Fed's Mester says case for rate increases is compelling

LEXINGTON, Ky. (Reuters) - The U.S. labor market is at full strength and the Federal Reserve needs to be on a path of gradual interest rate increases, Cleveland Fed President Loretta Mester said on Thursday.

"It seems like a gradual increase from a very low interest rate that we are at now is pretty compelling to me," Mester told reporters in Lexington, Kentucky, without saying whether she would support an increase at the Fed's policy meeting later this month.

Her comments reinforced the signals sent from some policymakers of a growing readiness to raise interest rates if data shows the economy is gathering strength.

Fed Chair Janet Yellen said last week she thought the case had grown stronger in recent months for an interest rate increase and Fed Vice Chair Stanley Fischer said Yellen's remarks were consistent with a view that the U.S. central bank might raise rates at its Sept. 20-21 policy meeting.

Mester, a voting member on the Fed's policy-setting committee, had earlier in the day told a philanthropy conference that the U.S. economy probably needs to generate between 75,000 and 150,000 jobs per month to keep the jobless rate stable.

Hiring has been stronger than that this year and the U.S. jobless rate is currently at 4.9 percent.

"The economy is basically at full employment," Mester said.

The U.S. Labor Department's monthly employment report on Friday is expected to show the economy added 180,000 jobs in August , according to the median forecast in a Reuters poll.

Mester said she said she did not share the view labor activists delivered to Fed officials last week that low interest rates could help resolve racial income and employment gaps in America.

"I do not believe that at this point in the business cycle the current very low level of interest rates is an effective solution to these longer-run issues," she said.

Mester said last week it makes sense for the Fed to start raising rates.

(Reporting by Jason Lange; Editing by Andrea Ricci)