The economy can handle lift-off, according to Federal Reserve Bank of Cleveland President and Chief Executive Officer Loretta J. Mester, who noted a small increase in the fed funds rate would mean monetary policy should remain accommodative "for some time to come."
Base on the summary of economic projections, Mester said, 15 of 17 Federal Open Market Committee participants expect rates to rise this year. "My own assessment is that the economy can handle an increase in the fed funds rate," she told the Columbus Metropolitan Club, according to prepared text of her remarks. "A small increase in interest rates from zero is not tight monetary policy, and with the economic progress we've made and that I expect to continue, monetary policy can take a step back from the emergency measure of zero interest rates."
However, she noted other members of the FOMC "might like to see more confirming evidence before commencing a rate increase," noting there could be differences of opinion "about realized and anticipated progress toward [the dual] goals [of price stability and full employment] and about the potential costs and benefits to changes in policy with respect to achieving those goals."
Further, Mester said, a "meeting or two" difference in when rates rise "is not significant," since it's the future path of monetary policy that matters. "According to the FOMC's current assessment, even after the first rate increase, monetary policy is expected to remain very accommodative for some time to come, with rates expected to move up only gradually to more normal levels and with the decisions about that path depending on incoming information on the economy's performance. One benefit of the gradual approach is that it will allow us to recalibrate policy over time as some of the uncertainties surrounding the underlying economy in the post-crisis world, like the potential growth rate, are resolved."
Mester sees economic growth of 2.75% to 3% the rest of this year and 2016. Risks to this forecast include slowing growth abroad, including the Greek economic woes, which she expected to have only "a limited impact on the U.S. economy because our direct exposure via trade and banking is limited."
With 245,000 jobs on average having been created each month in the past year, the jobless rate down to 5.3%, and early indications of wage growth, Mester said, the "evidence suggests that the economy is at or nearly at the Fed's mandated monetary policy goal of maximum employment."
While the market still faces longer-term challenges, "monetary policy is not the tool for addressing" these concerns, Mester said.
