Fed's Mester: Comfortable Raising Rates Again By Dec

--No Specific Inflation Prerequisite to Next Hike; Trend Looks Positive

--Even if SEP 'Tweaked' Due to Infl Softness, Consistent w/Her Outlook

--Inflation Expectations Still Reasonably Stable 

By Jean Yung

     PITTSBURGH (MNI) - Federal Reserve Bank of Cleveland President Loretta

Mester said Thursday she would be comfortable with another interest rate

increase by the end of the year and that she sees no specific level of inflation

that would be a precondition to that next tightening move. 

     "I am comfortable raising rates again this year," and "if the economy keeps

evolving the way I anticipate it wouldn't be a surprise," she told reporters

after delivering a speech to the Economic Club of Pittsburgh. 

     "My projection is still that inflation is going to rise to 2% gradually

over time, and in that case, I think this gradual path that we've been talking

about for quite a long time is the appropriate path." 

     Asked if she would support a rate hike even if consumer inflation remained

at 1.4%, its level in July, Mester said, "It depends on the outlook. I can't

give you a number and just say it's this number and we're doing it or not doing

it. It's really going to depend on what's underneath those numbers." 

     And so far, she has not seen reason to make a material change to her

inflation forecast or her outlook on rates, though the recent soft patch in

inflation may prompt some small shifts to the Summary of Economic Projections

later this month, she said. Mester votes next year on the Federal Open Market

Committee. 

     "I think the fed funds path that's in the SEP is about right, it may be

tweaked a little bit in the next round of forecasts, given the lower inflation

numbers that we've recently gotten," Mester said. "Even if that's tweaked a

little bit, I would say that's consistent with my outlook." 

     Mester in her prepared speech attributed the weakness in recent inflation

reports to "special factors" such as the drop in the prices of prescription

drugs and cell phone service plans earlier in the year. 

     "It may take a couple more months for these factors to work themselves

through, but these types of price declines aren't signaling a general downward

trend in consumer prices from weak demand," she said. "Instead, they reflect

supply-side factors and relative price changes." 

     She cautioned that the Fed still needs to be "cognizant of inflation

expectations numbers," because weak inflation, "no matter what the source, can

become a problem if they start to undermine the public's expectations about

future inflation." 

     So far, they're "still reasonably stable," Mester said. But, if inflation

expectations were to began to decline steadily, "it would be much more difficult

to raise inflation back to the Fed's goal."

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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