The Federal Open Market Committee should be able to gradually raise the fed funds rate target this year, Federal Reserve Bank of Cleveland President and Chief Executive Officer Loretta J. Mester repeated Wednesday.
“In my view, it will be appropriate for monetary policymakers to continue to gradually reduce the level of accommodation this year,” Mester told the Cleveland Association for Business Economics, according to prepared text released by the Fed, which was similar to her remarks on April 1.
“Gradual normalization means that monetary policy will remain accommodative for some time to come, providing support to the economy and insurance against downside risks,” she said.
Mester said she didn’t dissent at the last FOMC meeting because “limited” data were available and waiting for further information was “reasonable.”
Also, she said, “I do not think the FOMC is behind the curve, but while there are risks to moving too soon, there are also risks to waiting too long to take the next steps on the normalization path given the lags with which monetary policy affects the economy.”
Still, not “every piece of data” needs to line “up in the correct way” before a rate hike, and waiting “too long in light of financial market volatility that doesn’t affect the outlook may simply produce more volatility in the future,” she said.
Despite financial market volatility to begin the year, fundamentals are sound and the economy should grow 2.25% to 2.5% this year, “slightly above its longer-run trend and sufficient to generate further job gains and a further reduction in the unemployment rate this year,” she said. And inflation should move higher.
Mester stressed that “data-dependent” does not mean the FOMC will react to short-term fluctuations. “One of the challenges for monetary policymakers is making low-frequency policy in a high-frequency world. We need to extract the signal about where the economy is headed from economic and financial market information that can often be noisy.”
Since December, Mester said, she’s slightly lowered her projections for longer-term growth, unemployment and the fed funds rate 25 basis points each, since she said her estimates were “on the high side of FOMC projections.” The changes, as well as the differences between her estimates and other FOMC participants’ “are not statistically significant.”
Recent inflation data “have been somewhat encouraging and in accord with the pattern anticipated by the FOMC,” she said. With oil prices and the dollar stabilizing, measures of inflation have risen, and not just for one month. “Based on the evidence at hand, if the real side of the economy continues to perform consistent with my projections, I expect inflation to remain low this year but to gradually move back to our goal of 2 percent over the next couple of years,” she said.
Risks to both the upside – stronger consumer spending -- and downside -- the dollar and oil prices – exist.
Mester called the change in the Summary of Economic Projections “an excellent illustration of how our policy is data dependent” and reiterated that “no one should read the median path in the SEP as a promised policy path.”
