Mester Says `Strong Case' Liftoff Conditions Have Been Met

  • Says a small increase from zero would not make policy `tight'
  • Sees growth rebound to 2.5%-2.7% range after weak 3Q

Federal Reserve Bank of Cleveland President Loretta Mester said a strengthening U.S. economy is ready for higher interest rates as she predicted growth of 2.5 percent to 2.75 percent through the rest of this year and next year and called for a gradual path of tightening after liftoff.

“Given the economic outlook, starting the process to normalize interest rates will help ensure that we can, indeed, take a gradual approach,” Mester said, according to the text of a speech she is scheduled to deliver later on Friday to the City Club of Cleveland. “Delay risks having to move rates up more steeply in order to promote attainment of our goals over time.”

Mester, who votes next year on the policy-setting Federal Open Market Committee, said a “small increase in interest rates from zero is not tight monetary policy” and likely wouldn’t provoke a reaction in markets that would affect the outlook for the economy.

Hike Signal

The FOMC meets Dec. 15-16 in Washington to decide whether to hike its benchmark interest rate for the first time in almost a decade. At its last session, in October, officials signaled they would be open to a move in December if labor market conditions continued to improve and they were confident that inflation would head back toward their 2 percent target in the medium term.

The target range of the federal funds rate has been near zero since December 2008.

“If economic information continues to come in consistent with the outlook, then there will be a strong case that the conditions for liftoff have been met and it would be prudent for monetary policy to take a step back from the emergency measure of zero interest rates,” she said.

Mester, 57, pointed to robust consumer spending and continued progress for job seekers this year, even as growth fluctuated quarter-to-quarter and financial markets experienced turmoil this summer caused by worries over China’s economy.

“The resiliency of the economy through the episode in August, as well as the strength in final sales in the third quarter, suggests to me that there continues to be positive economic momentum,” she said.

While noting that the pace of jobs gains had slowed in August and September, employers added a "very robust" 271,000 new hires last month, Mester said, adding that the rate of employment gains in recent months was still “enough to put downward pressure on the unemployment rate.”

Mester said that because she forecasts that inflation won’t rise back to the Fed’s 2 percent goal before early 2017, she doesn’t “see an urgency to increase rates sharply.” She also said that the Summary of Economic Projections, released quarterly by policy makers, will provide insight into the expected pace of tightening after liftoff.

“Looking at the SEPs is the best indicator of what the current thinking of the participants is on the gradual path,” she told reporters after the speech. Officials will present updated projections at the next meeting of the FOMC on Dec. 15-16.

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