The first interest rate hike "will soon be appropriate," Federal Reserve Bank of Cleveland President and Chief Executive Officer Loretta J. Mester said Wednesday, noting she'd even agree to liftoff in the first half of the year.
"Based on realized and expected progress toward our goals, I believe it will soon be appropriate to begin moving interest rates up from zero," she told the Ohio Bankers League Economic Summit.
The economy is better "than it has been for some time," and while risks remain, Mester said she expects the economy to grow and average 3% through the end of 2016. "While the drop in oil prices will lower inflation in the near term, as oil prices stabilize, output and employment growth continue, and inflation expectations remain anchored, I expect inflation to gradually move back to the Fed's goal of 2 percent."
Monetary policy works with a lag, she noted, so "policymakers need to be forward looking" and consider progress and expected progress toward its dual mandate. "Because policy must be forward looking, in my view liftoff should occur before our goals are fully met."
Even after the first rate hike, Mester said, monetary policy will be accommodative. Rate changes will be based on data, and are not on a "pre-set path," she stressed.
Since "the public won't be able to immediately see whether a policy action taken by the Fed was a good one," Mester said, "clear communication about monetary policy is so important. It is incumbent upon policymakers to explain the rationale for their decisions, including their evaluation of economic conditions as well as their outlook for the economy."
While the six-year journey out of the Great Recession "hasn't broken any speed limits," and has had a few starts and stops, she said, "There are accumulating signs that the economy is building momentum and that, this time, a pickup in speed will be sustained because the underlying fundamentals have improved."
Mester noted, "Many of the so-called headwinds that held back the pace of growth earlier in the expansion and dampened the effect of very accommodative monetary policy on the economy have abated, suggesting that the economic momentum at the start of this year is likely to be sustained."
Lastly, Mester attacked "calls to audit the Fed," which she said "are misnamed and misguided." Those pushing the audits are not really interested in auditing the Fed, which "is already subject to many audits of its financial statements and activities, and Chair Yellen regularly testifies before Congress on monetary policy." But rather they want "political considerations to influence monetary policy decisions."
"This would be a tremendous mistake because it would ultimately lead to poorer economic performance," Mester said. "I strongly believe that the Federal Reserve's independence in setting monetary policy is worth preserving."
