St. Louis » Federal Reserve Bank of St. Louis President James Bullard said a falling unemployment rate is a precondition for an increase in the benchmark interest rate from near zero.

"You want to see the economy start to recover in all its dimensions, output and trade" before tightening, Bullard said today in a Bloomberg Radio interview in St. Louis. "We do have some of those turning around now."

Central bankers are debating when to start withdrawing record liquidity as the U.S. economy emerges from the worst recession since the Great Depression. Richmond Fed President Jeffrey Lacker said this month the Fed may need to increase interest rates even if the jobless rate persists near 10 percent.

Since 1954, the central bank has raised rates only after unemployment has peaked, Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc., said in a research note in August.

"You want some jobs growth and unemployment coming down. That is a prerequisite" for an increase in interest rates, Bullard said. "It doesn't mean you need unemployment all the way down to more normal levels." The jobless rate hit a 26-year high last month of 9.8 percent, the Labor Department said.

Bullard, referring to a prior jobless rate of 10.8 percent, said "I don't think we will quite hit the peak we hit in 1982, but things have surprised us before."

"I'm hopeful the pace of increase in unemployment is

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slowing down and it will start to tick down in 2010," he said.

Kansas City Fed President Thomas Hoenig said last week the central bank should start raising interest rates "sooner rather than later," and Fed Governor Kevin Warsh said on Sept. 25 the Fed may need to tighten "with greater force than is customary."