Fed's Bostic sees gradual rate hikes to balance growth, inflation

MONTGOMERY, Ala. (Reuters) - The Federal Reserve should aim to raise interest rates gradually, despite weak inflation readings, in part because any spike in demand could push the U.S. economy beyond its sustainable levels, one of the newest Fed policymakers said on Tuesday.

Atlanta Fed President Raphael Bostic, who began the job mid-year and fleshed out his thinking on Tuesday, said overall economic activity has grown at "a reasonably solid pace" in recent months despite hurricanes that have hit his southeast U.S. district.

"I think it will be appropriate for interest rates to rise gradually over the next couple of years," Bostic, who votes on policy next year, said at an economic forum in Montgomery, Alabama.

Noting that while inflation has "softened" this year, he said he remains convinced that it will soon rebound. "I'll be watching the next few inflation reports closely for signs of a pickup," he said.

Bostic told Reuters last month he expected another rate hike this year, and financial markets widely expect that to happen next month in part due to economic growth of about 3 percent in the last two quarters. The central bank has tightened policy twice this year, as the unemployment rate has fallen to 4.1 percent last month.

"The national economy is nearing full employment, meaning that a spike in demand could push the economy beyond its sustainable capacity," said Bostic, adding that tax reform, if enacted in Washington, "could be one of the needle-movers" for growth.

Congressional Republicans aim to enact tax-cut legislation before year end.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)