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Free AccessREPEAT: Clev Fed's Mester: Further Rate Hikes 'Will Be Needed'
Repeats Story Initially Transmitted at 15:00 GMT Aug 2/11:00 EST Aug 2
--Expects Infl to Reach 2% Target in Next Year or So Despite Recent Weakness
--Need to Continue Moving on Rate Hikes Because of Lag in Economic Impact
By Karen Mracek
WASHINGTON (MNI) - Cleveland Federal Reserve Bank President Loretta Mester
said Wednesday the Federal Open Market Committee shouldn't wait too long to
raise interest rates higher even as she scrutinizes recent data to make sure the
weaker than expected inflation readings won't prevent the Fed from hitting its
2% target.
"We can't wait until the goals are fully met because monetary policy
affects the economy with a lag," Mester said in remarks prepared for the
Community Bankers Association of Ohio's annual convention in Cincinnati.
"We need to remain focused on the medium-run outlook," she said, adding "If
economic conditions evolve as anticipated, I believe further removal of
accommodation via gradual increases in the fed funds rate will be needed."
Mester, a 2018 voter on the FOMC, did not say exactly when the next rate
hike should come, or when the FOMC should begin to wind down its $4.5 trillion
balance sheet. She repeated the committee could announce a change to its
reinvestment policy "relatively soon," which was the language used in the
post-meeting statement July 26.
"The gradual, predictable decline allows balance-sheet normalization to run
in the background and monetary policy to focus on setting the appropriate level
of the funds rate, our conventional monetary policy tool," Mester said.
Regarding the ultimate size of the balance sheet, she said, "the intention
is to reduce it over time to the smallest size needed to implement monetary
policy efficiently and effectively."
But "because it will take several years to reduce the size of the balance
sheet through asset run-off, the FOMC can begin normalizing the balance sheet
before we have decided on the balance sheet's ultimate size," Mester said.
Even while sounding confident more rate hikes will be needed, Mester did
express some concern about recent weaker-than-expected inflation readings.
"Some of the weakness in recent inflation reports reflects special factors,
like the drop in the prices of prescription drugs and cell phone service plans,"
she said. "It may take a couple of months for these factors to work themselves
through, but these types of price declines aren't signaling a general downward
trend in consumer prices."
Still, she'll "be scrutinizing incoming inflation data and reports from my
business contacts, but at this point, my assessment is that the conditions
remain in place for inflation to gradually return over the next year or so to
our symmetric goal of 2% on a sustained basis."
These conditions include "growth that's expected to be at or slightly above
trend, continued strength in the labor market, and reasonably stable inflation
expectations," Mester said. Overall, though, "I believe the underlying
fundamentals supporting the economic expansion remain sound."
--MNI Washington Bureau;tel: +1 202 371-2121; email: karen.mracek@marketnews.com
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.