Casting doubt on the reliability of traditional economic models that would predict an inevitable pick-up in prices amid the current setting of strong growth and low unemployment, Ferguson said the Fed needed to watch the economy carefully but act immediately should signs of rising inflation appear.

"What we should do in the face of some uncertainty is to act cautiously while remaining vigilant, to take measured steps when necessary, and to adjust to the occasional unforeseen change," he said in a speech at the Federal Reserve Bank of Atlanta.

Calling the performance of the US economy during its eighth year of an unbroken expansion "extraordinary", Ferguson said recent developments had called into question some old economic beliefs, such as the idea that inflation will pick upautomatically should unemployment fall below a certain level. In fact, there was even a possibility that the economy may continue to grow as strongly as it has over recent quarters, without necessarily setting off inflation sirens, he said.

"The increased uncertainty... implies that continued strong economic growth with low inflation is not outside the realm of possibility, and by adopting a cautious policy posture we may learn more clearly if that possibility is likely or remote," he said.

Ferguson added that it was possible that productivity improvements had enabled the economy to grow faster while making it less inflation-prone, but warned that the evidence was still sketchy. "We should be open to that possibility. But I don't believe the evidence is fully there yet," he said. Ferguson's defence of a pragmatic approach to determining US interest rates was in stark contrast to his warning almost three months ago when he said in an interview that the central bank would have no choice but to raise ratesto prevent the economy from overheating unless growth slowed down soon.