The U.S. unemployment rate will likely decline only gradually, giving the Federal Reserve room to keep interest rates low until the economic recovery becomes self-sustaining, a top Federal Reserve policymaker said on Friday.

Boston Federal Reserve Bank President Eric Rosengren's remarks followed government data on Friday that showed U.S. employers unexpectedly cut 85,000 jobs in December, cooling optimism on the labor market's recovery. The unemployment rate was unchanged at 10 percent.

Rosengren, speaking at a Connecticut Business and Industry Association conference, said that the employment picture will improve only slowly and added the unemployment rate will likely remain quite elevated in the early phases of the recovery.

Economic growth will likely be strong enough to produce some jobs growth, he said, but not fast enough to put a big dent in the jobless rate.

The high unemployment rate, as well as cautious consumers and businesses and continued banking strains, are significant economic headwinds, Rosengren said. These headwinds mean the Fed should be in no rush to tighten policy, he said.

With significant capacity in labor markets, wages and salaries and the ability of businesses to increase prices are all likely to be restrained, resulting in little immediate inflationary pressures, Rosengren said.

In my view this should allow for accommodative monetary policy to continue to support the economy until the underlying demand of consumers and businesses becomes self-sustaining, he said.

Rosengren, seen as one of the more growth-focused doves among top Fed officials, is a voting member of the U.S. central bank's policy-setting Federal Open Market Committee this year.

The Fed cut its benchmark interest rate to near zero in December 2008 and put in place an array of liquidity and purchase programs as it combated the worst recession in some 70 years. The U.S. central bank has vowed to keep rates low for an extended period.

Markets are closely watching for clues on the timing of the Fed's exit from its extraordinary economic and financial support. Most analysts expect the Fed to raise interest rates in the second half of 2010.

Rosengren said that gross domestic product growth, a gauge of economic activity, was likely stronger in the fourth quarter of 2009 than in the third quarter, partly due to businesses cutting inventories less aggressively.

He said that while inventory rebuilding will likely provide some spark, the strength of underlying demand as government stimulus subsides is an open question.

Banking problems remain, with banks holding back on lending due to concerns with their own balance sheets and capital ratios, Rosengren said.

And severe recessions can have a significant impact on how quickly firms resume hiring, Rosengren said. Firms may be reluctant to hire workers who have been unemployed for a lengthy period, for example.

Currently the percentage of the unemployed who have been out of work for 27 weeks or more is much higher than in previous recessions... This is likely to be one impediment to our seeing significant, speedy declines in unemployment, Rosengren said. Also, with businesses still unsure the recovery is sustainable, they may hold off on adding permanent staff, he said.

The combination of these labor market challenges and the headwinds from problems in the banking sector make it quite likely that the unemployment rate will decline only gradually, Rosengren said.

(Editing by Chizu Nomiyama)

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