MNI: Fed's Mester Wants Faster Hikes If Inflation Stays

Interest rates should rise in March followed by potentially faster hikes in the second half of the year to get inflation under control if price rises don't show signs of slowing by mid-year, Cleveland Fed President Loretta Mester said Wednesday, adding that she also wants to start shrinking the balance sheet soon.

"Barring an unexpected turn in the economy, I support beginning to remove accommodation by moving the funds rate up in March," she said in remarks prepared for The European Economics and Financial Centre.

Inflation readings in the U.S. are at their highest levels in four decades and nominal wages are accelerating at a faster pace than seen in decades, she said. Labor markets are "very strong" and the demand for workers is "well outstripping supply."

"Increases in the fed funds rate in the coming months will be needed, but the ultimate path of rates in terms of the number and pace of increases will depend on how the economy evolves," she said. "For example, if by mid-year, I assess that inflation is not going to moderate as expected, then I would support removing accommodation at a faster pace over the second half of the year."

ASSET RUNOFFS

Conditions also warrant that "we start balance-sheet reductions soon and go at a faster pace than we did last time," Mester said.

The Fed should allow assets to run off in a predictable way over time and sell some of its mortgage-backed securities "at some point during the reduction period" to get to a primarily Treasuries portfolio, she said.

When to stop reductions of the balance sheet will depend on the banking sector’s demand for reserves, which will evolve over time, she said. The Fed also pledges to monitor developments in money markets to determine the appropriate levels of reserves and balance-sheet size at which to stop the reductions, she added.