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REPEAT: Fed's Mester: Comfortable Raising Rates Again By Dec

Repeats Story Initially Transmitted at 18:11 GMT Sep 7/14:11 EST Sep 7
--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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