Fed’s Mester Says Jobs, Inflation Outlook Justify Rate Hike

  • Cleveland Fed chief explains her dissent at FOMC last week
  • Sees risks from delayed rate increase amid resilient expansion

Loretta Mester

Photographer: Marlene Awaad/Bloomberg

Federal Reserve Bank of Cleveland President Loretta Mester said continued gains in the labor market this year, her outlook for higher growth and inflation, and receding global risks prompted her to call for an interest-rate increase when policy makers met last week in Washington.

“If we continue to delay even as we make further progress on our inflation goal and labor markets continue to tighten, we risk having to undertake a considerably steeper policy path later on,” Mester said in the text of a speech she is scheduled to deliver Wednesday in Cleveland.

Mester was one of three voting members of the Federal Open Market Committee to dissent in favor of hiking last week when policy makers elected to leave interest rates unchanged. In a statement following the meeting, the FOMC said the case for raising rates had strengthened, but the majority of officials wanted to see more evidence of progress in the economy.

In her first public comments explaining her dissent, Mester said she believes unemployment had reached its lowest sustainable level. Sharper hikes by the Fed could bring the economy’s recovery to an end, she said.

“If we delay too long and then find ourselves in a situation where the labor market becomes unsustainably tight, price pressures become excessive, and we have to move rates up steeply, we could risk a recession,” she said.

In her Sept. 21 press conference, Fed Chair Janet Yellen said leaving rates unchanged could help pull more Americans back into the work force without risking a sudden surge in inflation. She acknowledged the division in the committee, but said it was limited to views over the exact timing of the next increase in rates.

The Fed raised the target range of its benchmark federal funds rate to 0.25 percent to 0.5 percent in December, the first increase in almost a decade. Officials have since met six times without tightening policy, as even the labor market made steady progress.

Unemployment was 4.9 percent in August, at or very close to what many economists consider its lowest sustainable level. The Fed’s preferred measure of price pressures, after stripping out volatile energy and food components, rose 1.6 percent in the 12 months through July.

Mester said she expects growth to rebound in the second half of 2016 and to continue to expand at a pace slightly above 2 percent over the next two years. She also sees inflation returning gradually toward the Fed’s 2 percent target.

“Sometimes being prudent means moving the policy rate up,” she said.

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