Mester Sees Gradual Fed Rate Rises Shaped by Medium-Term Outlook

  • Says policy won't `react to every short-run change' in data
  • Start to increases helps to reduce financial stability risk

Federal Reserve Bank of Cleveland President Loretta Mester said on Sunday that the U.S. central bank expects to raise interest rates gradually while keeping an eye on the medium-term outlook, rather than reacting to short-term swings in the economic data.

The Fed lifted its benchmark policy rate for the first time since 2006 in December, turning attention to the timing and pace of future rate increases. Officials have said that they’ll proceed gradually if they can, but that their rate decisions will hinge on economic data.

That data-dependency is “shorthand for this more comprehensive process of parsing economic and financial information to determine current economic conditions, and then assessing what that information implies about the economic outlook and the risks around that outlook,” Mester said Sunday in remarks prepared for delivery at the annual American Economic Association meeting in San Francisco.

“Thus, ‘data dependent’ policy making does not mean that policy will react to every short-run change in the data,” she said.

Mester, who votes on the policy-setting Federal Open Market Committee this year, said the Fed’s plan to raise interest rates gradually will allow officials to adjust policy as they learn more about the ability of the economy to grow without spurring inflation. The gradual path will also help to “mitigate any potential for building risks to financial stability” stemming from a reach for yield by investors, she said.

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