Outlook supports gradual rate increases, says Cleveland Fed president

Increasing rates is the "best strategy for balancing risks," she says

By Francis Monfort

16 May 2018

A member of the Federal Reserve’s rate-setting Federal Open Market Committee (FOMC) for 2018 has expressed support for the gradual increase in US interest rates.

Loretta Mester, president and CEO of the Federal Reserve Bank of Cleveland, spoke at the Global Interdependence Center Central Banking Series with Banque de France in Paris, France. Mester is serving a one-year term on the FOMC on a rotation basis.

“In my view, the medium-run outlook supports the continued gradual removal of policy accommodation; it seems the best strategy for balancing the risks to both of our policy goals and avoiding a build-up of financial stability risks,” Mester said in her speech.

Mester also said that she does not expect inflation to pick up sharply, adding that they want to give inflation time to get back to goal. She also said she views it appropriate to continue removing some of the monetary policy accommodation. This would prevent a build-up in macroeconomic risks that may happen if the economy were allowed to overheat as well as avoid a build-up of financial stability risks that may come about due to an extended period of very low interest rates.

“Of course, the path policy actually takes will depend on how the economy actually evolves,” Mester said. “If the upside risks to growth come to pass, we may need to steepen the path a bit; if inflation surprises on the downside, we may need to go a bit slower, but the gradual upward path is consistent with the modal economic outlook at this time.”

Mester expects inflation to reach the Fed’s symmetric 2% goal on a sustainable basis over the next one to two years. She said her outlook is based on favorable underlying fundamentals, including accommodative monetary and fiscal policies, healthy household balance sheets, rising personal income, a global economy that is improving overall, and stable inflation expectations.