Gradual rate hikes remain the best path of monetary policy, and while inflation is near the Fed’s target, it’s “too soon” to declare victory, Federal Reserve Bank of Cleveland President Loretta Mester said Monday.

Federal Reserve Bank of Cleveland President Loretta Mester
Federal Reserve Bank of Cleveland President Loretta Mester Bloomberg News

“[I]t is too soon to say that we have met our inflation goal on a sustained basis,” Mester said in a conference in France, according to prepared text released by the Fed. “Near-term monthly readings of inflation have risen, but some of the pickup reflects higher commodity prices and some of the strength is likely to be temporary, as low readings from last March drop out of the calculations.”

Numbers can vary, but the data suggest “an underlying upward trend in inflation, as inflation moves to our goal on a sustainable basis over the next year or so,” she said. Expectations shouldn’t be based on month-by-month changes which can be volatile.

“Consistent with the FOMC’s longer-run monetary policy strategy, I am comfortable looking through transitory movements in inflation – those to the low side and those to the high side – as we aim for inflation over the longer run to be at our symmetric 2% objective, allowing for the normal variation in measured inflation.”

And, she noted, gradual removal of policy accommodation “seems the best strategy.” She explained, “We want to give inflation time to move back to goal, and I don’t expect inflation to pick up sharply; this argues against a steep path.”

“In my view, it is appropriate to continue to remove some of the monetary policy accommodation to ensure that we avoid a build-up in risks to macroeconomic stability that could arise if the economy were allowed to overheat or a build-up of financial imbalances or risks to financial stability that could arise from the extended period of very low interest rates,” she said, noting that depending on data, the path can be adjusted as needed.

It may be necessary for the fed funds rate to exceed the long-term expectations “for a time,” Mester said.

Mester also noted that now may be a good time “to assess whether changes to our current framework could make monetary policy more effective in achieving our goals.” She noted “alternative frameworks” have been suggested, including raising the inflation target, moving to an inflation-targeting range, and targeting a path for the price level or for nominal GDP rather than for inflation. “None of these alternative frameworks are without challenges, but the positives and negatives should be thoroughly reviewed to evaluate whether the net benefits of any of the alternatives would outweigh those of the flexible inflation-targeting framework currently in use.”

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Gary Siegel

Gary Siegel

Gary Siegel has been at The Bond Buyer since 1989, currently covering economic indicators and the Federal Reserve system.