Noting that waiting too long for a rate hike is as dangerous as acting too soon, Federal Reserve Bank of Cleveland President and Chief Executive Officer Loretta J. Mester said Friday her support of the Federal Open Market Committee's decision to hold rates at its last meeting was one of "timing" rather than a change in her outlook.
"I supported the decision not to change rates in June. My reason did not reflect a fundamental change to my outlook," Mester told the Distinguished Speakers Seminar in London, according to prepared text released by the Fed. "The progress being made on our policy goals and the outlook suggest that a gradual upward path of interest rates continued to be appropriate."
She noted the summary of economic projections had a "somewhat shallower" median fed funds rate path than the March projections "partly reflecting somewhat slower growth projected for this year, and partly reflecting a lower estimate of the fed funds rate over the longer run."
And while Mester said she still believes rates must rise gradually, she backed a delay in June because of "timing. There was considerable uncertainty about the outcome of the upcoming U.K. referendum on membership in the European Union. The vote was being held a week after the June FOMC meeting. It was clear there was going to be volatility in financial markets surrounding the vote. If the vote favored exit, there was the potential for disruption in markets. Given that I do not think U.S. monetary policy is behind the curve yet, I saw little cost in waiting to take the next step."
Mester went on to say she does not believe labor markets are ready to reverse and inflation data support "a gradual return to target."
"Now, some might argue that in an abundance of caution, we should wait for clarity on these issues, and I agree that there are risks to acting too soon. But there are also risks to forestalling rate increases for too long when we are continuing to make cumulative progress on our policy goals," Mester said. "Waiting too long increases risks to financial stability and raises the chance that we would have to move more aggressively in the future, which poses its own set of risks to the outlook. I believe waiting too long also jeopardizes our future ability to use the nontraditional monetary policy tools that the Fed developed to deal with the effects of the global financial crisis and deep recession. If we fail to gracefully navigate back toward a more normal policy stance at the appropriate time, then I believe there is a non-negligible chance that these tools will essentially be off the table because the public will have deemed them as ultimately ineffective. This is a risk to the outlook should we ever find ourselves in a situation of needing such tools in the future. Of course, such a risk is hard to measure and is not one we typically consider. But we live in atypical times, and we need to take the whole set of risks into account when assessing appropriate policy."
