MNI POLICY: Fed's Mester: Rates May Need to Move 'Bit Higher'

By Jean Yung

     WASHINGTON (MNI) - U.S. interest rates may need to move a bit higher if

growth picks back up to trend or higher, labor markets stay strong and inflation

remains near 2%, Cleveland Federal Reserve Bank President Loretta Mester said

Thursday. 

     "I see no urgency to change our policy stance" given rates are at the

bottom of the range of estimates for the neutral rate and "little sign that

inflation is poised to rise appreciably despite the strength in labor markets,"

Mester said. 

     But, "if the economy performs along the lines I think is the most likely

case -- with growth picking back up to, or slightly above, trend, labor markets

remaining strong, and inflation staying near 2 percent -- the fed funds rate may

need to move a bit higher than current levels," she said in a speech prepared

for Ohio bankers in Columbia, Ohio. 

     The following are other major takeaways from her speech: 

     --Recent data have been "mixed," indicating that growth softened in the

first quarter, but the weakness is likely temporary and growth for the year will

likely be at or above the 2% trend. 

     --Among downside risks, Mester cites continued uncertainty over trade

policy weighing on investment spending, the slowdown abroad and the unclear

outcome of Brexit. In addition, very high levels of corporate debt and weaker

underwriting standards on leveraged loans combined with lofty commercial real

estate valuations "have the potential to amplify an economic downturn, were one

to occur."

     --The Fed aims to return its balance sheet to one that consists primarily

of Treasuries and will be making decisions on how best to make that transition

at upcoming meetings.

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

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