Federal Reserve Bank of Cleveland President Loretta Mester said she expects 3 percent economic growth in the second half of this year and next year and that markets will be more volatile as accommodation concludes.
Mester, who votes on policy this year and is working on crafting communication policies, also said today in a speech in Pittsburgh that she sees unemployment falling to 5.5 percent, her estimate of the natural rate, by the end of next year. She said volatility “is not necessarily a bad thing” as an improving economy warrants normalization of monetary policy.
“The goal of communication is not to reduce all volatility -- volatility is a necessary part of price discovery in financial markets,” Mester said. “But the better we can communicate our monetary policy framework and the basis for policy decisions, the more likely we can avoid undesirable disruptions and turbulence that could result from misunderstandings.”
Mester’s speech is her first since becoming president of the district bank in June after almost three decades at the Philadelphia Fed, where she had served as research director since 2000. She is a member of Fed Vice Chairman Stanley Fischer’s subcommittee on communications issues.
Fed officials are on pace to conclude a two-year asset purchase program next month as a faster-than-forecast decline in the jobless rate puts pressure on officials to move up the timing of the first increase in the main interest rate since 2006. They’re trying to determine when and how quickly to raise the main rate without roiling markets and causing another downturn.
In her speech, Mester said the Fed needs to “reformulate” its forward guidance on the future path of monetary policy. She said she prefers guidance to “convey that changes in the stance of policy will be calibrated to the economy’s actual progress” as well as anticipated achievements toward the Fed’s mandates for full employment and price stability.
“A faster pace of progress toward our goals would argue for a faster return to normal, while a more subdued pace would argue for a slower return,” Mester said. She said she doesn’t support announcing a time when rates will rise.
“Using a calendar date at this point would be poor communication,” she said. “It could mislead the public into thinking that policy is on a pre-set course. If the public doesn’t understand that policy is dynamic and based on the economic outlook, then a change in the guidance can create its own disruption.”
Mester said while there’s been improvement in the labor market, progress is “not yet complete.”
Employers added more than 200,000 jobs for a sixth straight month in July, the longest stretch since 1997, Labor Department data show. The jobless rate rose to 6.2 percent as more people entered the labor force in search of work, after falling 0.6 percentage point during the first half of the year.
Inflation will move back toward the Fed’s 2 percent objective “over time” even though there has not been “much acceleration” in wages, she said.
“It is difficult to find a lead-lag relationship between wages and prices,” Mester said. “We should expect wages to rise with prices, not necessarily lead prices. In my view, it would not be prudent for policy makers to simply wait for wages to accelerate before assessing the implications of the stance of monetary policy for future price inflation.”
Federal Open Market Committee participants will release their next set of quarterly projections on growth, employment, inflation and the rate outlook after the next meeting Sept. 16-17.
Mester voted in favor of the the FOMC statements at her first two meetings in June and July. Philadelphia Fed President Charles Plosser dissented in July, objecting that the guidance on the timing of a rate increase was “time dependent” and didn’t reflect “considerable economic progress.”
The Cleveland district covers Ohio, western Pennsylvania, eastern Kentucky, and part of northern West Virginia. The reserve bank is the supervisor of banks including PNC Financial Services Group Inc. in Pittsburgh and KeyCorp in Cleveland.
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