Fed's Mester Calls for Additional Rate Increases -- Update

By Michael S. Derby Features Dow Jones Newswires

Federal Reserve Bank of Cleveland President Loretta Mester on Monday called for additional central bank rate rises and added the U.S. central bank can likely act to start shrinking the size of its massive holdings of cash and bonds later this year.

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"We have met the maximum employment part of our mandate and inflation is nearing our 2% goal" and risks to the economy are "roughly balanced," Ms. Mester said. "If economic conditions evolve as anticipated, I believe further removal of accommodation via increases in the federal-funds rate will be needed," she told the Chicago Council on Global Affairs in the text of a speech prepared for that event.

That said, the official noted the Fed will be responsive to incoming data, saying "there are risks around the economic outlook, and because of that, policy is not preset."

Ms. Mester's comments on the outlook for the economy and central bank were her first since last week's gathering of the interest-rate setting Federal Open Market Committee, which left the Fed's short-term rate target unchanged at a range between 0.75% and 1%. Officials are widely expected to raise borrowing costs again in June and one more time after that as they push short-term interest rates back to a level they consider more neutral in regards to their impact on growth.

"I don't believe that removing accommodation calls for an increase in the fed-funds rate at each meeting, but I do anticipate more than the one-increase-per-year seen in the past two years," Ms. Mester said. She also said it's critical for the Fed to be "very vigilant" against the prospect of falling behind on its goals, because allowing inflation to fire up beyond desired levels could force officials to raise rates faster than they'd now like.

Ms. Mester said the likely path of Fed rate rises "will help prolong the expansion, not curtail it." Like many other officials, she also said this year will be the time for the Fed to start shrinking its $4.5 trillion holdings of cash and bonds.

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"If economic conditions evolve as I anticipate, I would be comfortable changing our reinvestment policy this year," which would allow the balance sheet to grow smaller more or less automatically, the official explained. "My preference is that once we decide on a plan, we stay with it; the fed-funds rate should be our main tool for responding to changes in the outlook during normal times," Ms. Mester added.

In her speech, Ms. Mester was largely upbeat about the state of the economy and she was willing to look through some of the recent data that has pointed to a slower performance than had been expected.

"It is normal to see variability in the monthly and quarterly data," Ms. Mester said, and "the underlying fundamentals supporting continued expansion remain sound." She said she sees coming economic growth at or just above 2%, and she said that the jobless rate, which now stands at 4.4%, should stay under 5% for the next couple of years.

The officials also expects a "sustained return over the next year or so" to the Fed's 2% price rise target. Ms. Mester also said there's mounting evidence wage gains are picking up, and she said the housing sector continues to grow. Business spending is also picking up, and while she expects monthly hiring gains to cool, the policy maker believes they'll remain sufficiently strong enough to keep the unemployment rate low.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

May 08, 2017 09:19 ET (13:19 GMT)