A rate hike is "appropriate" to prolong the economic expansion, Federal Reserve Bank of Cleveland President Loretta J. Mester said Wednesday.
"I view a small step up in interest rates as appropriate, not because I want to curtail the expansion, but because I believe it will help prolong the expansion," Mester said at a luncheon in Pittsburgh, according to prepared text released by the Fed.
Mester said, "economic developments have corroborated the Committee's medium-run outlook that labor markets will continue to show strength, that growth will rebound to a pace at or slightly above trend, and that inflation will gradually rise to our 2 percent target."
She noted "sustained" labor market improvement that "is now basically at full employment from the standpoint of what monetary policy can do, and inflation has been moving up closer to our goal. I view the risks to the outlook as broadly balanced."
Because monetary policy works with a lag, Mester said, "policy actions have to be taken before our policy goals are fully met."
Although the Fed is not "behind the curve yet," Mester said, "I think the risks to macroeconomic stability and to financial stability will grow over time should we fail to take appropriate action given where we are on our goals and the current low level of our policy rate. I view another increase in interest rates as a prudent step to take."
Economic developments are apt to support a gradual rise in rates. "That means that the policy rate won't be moving up at each meeting and that policy will remain accommodative for some time, continuing to lend support to the economic expansion going forward," Mester said. "It will allow us to recalibrate policy over time as we gain more insight into the underlying structural aspects of the post-crisis economy and as the economy evolves."
