The Federal Open Market Committee should be able to carry out its expectations for gradual increases in the fed funds target rate, Federal Reserve Bank of Cleveland President and Chief Executive Officer Loretta J. Mester said Friday.
"Given my outlook that the economy will work through this rough patch and resume a trajectory of moderate growth, with continued improvement in labor markets and a gradual return of inflation to 2 percent, I believe the appropriate policy path will involve gradual reductions over time in the extraordinary level of accommodation that was necessary to address the Great Recession," she told an audience in Sarasota, Fla., according to prepared text released by the Fed. "Even as policy gradually normalizes, it will likely need to remain accommodative for some time to come, given some of the forces still impacting our economy – for example, slow growth abroad, dollar appreciation, more restrictive financial conditions, and the continued rebalancing of supply and demand in the energy sector."
"At this point, I see the market volatility and sharp drop in oil prices as posing risks to the forecast, but I believe it is premature to conclude they necessitate a material change in my modal economic outlook," Mester said.
Of course, economic developments and data will determine the exact timing of the hikes. "As we've seen, things can take unexpected turns," she said. "Our economic forecasting models are, by necessity, simplifications."
Mester noted economic forecasts are surrounded by "wide" confidence bands. "But just because we cannot forecast the future with as much precision as we'd like does not mean the exercise is without value. The discipline of forecasting how the economy might evolve over the medium run and assessing the uncertainty around the forecast is an essential part of the framework for setting monetary policy. It provides a useful methodology to help policymakers avoid focusing too much on short-run changes in the economic data or volatility in the markets," she said.
The fed funds rate is "well-calibrated to the economic outlook and the risks around that outlook," Mester said in explaining why she backed the FOMC's decision to leave rates unchanged in January. "December's increase in the rate from essentially zero recognized the considerable progress the economy has made since the Great Recession, which officially ended more than six years ago, as well as the FOMC's outlook that the economy will improve further, supported by monetary policy that continues to be quite accommodative," she said. "The rate increase in December was a step on the path toward more normal policy, a journey that arguably began in October 2014 when the FOMC ended its third large-scale asset purchase program, also known as quantitative easing, or QE3."
