Mester sees hikes this year and next, with data determining pace

The Federal Reserve will need to continue raising interest rates this year and next, but the pace will be determined by data, Federal Reserve Bank of Cleveland President Loretta Mester said late Thursday.

mester-loretta-08-28-15-bl-357.jpg

“The path policy actually takes will depend on how the economy actually evolves,” Mester said in a speech at the University of Pittsburgh, according to prepared remarks released by the Fed. “If the upside risks to growth come to pass, we may need to steepen the path a bit; if inflation surprises on the downside, we may need to go a bit slower.”

The Federal Open Market Committee in March raised the fed funds rate target to a 1.5% to 1.75% range. “I supported this increase, and if the economy evolves as I anticipate, I believe further increases in interest rates will be appropriate this year and next year,” she said.

The gradual increases will keep the expansion going “and balance the risks so that our monetary policy goals are met and maintained.”

Mester discussed the slowing labor force growth and productivity growth, which are needed to maintain the nation’s standard of living.

“The combination of slow labor force growth and slow productivity growth suggests that the potential growth rate of the economy will be lower than it was in the past,” she said, pushing for policies that set a sustainable path for the longer run fiscal health. Specifically, she mentioned, lowering the federal deficit as a share of GDP.

“Unless the U.S. can get its longer-run fiscal situation in order, high debt levels will constrain using fiscal policy as a tool to buoy the economy in recessions,” Mester said. “This will put more of the burden on monetary policy to stimulate the economy during downturns. But in a world with lower potential growth and lower equilibrium interest rates, monetary policy will also have less room to act. The zero lower bound on interest rates would be hit more often, and we would find ourselves having to rely more often on nonconventional policy tools like asset purchases.”

For reprint and licensing requests for this article, click here.
Monetary policy Federal Reserve FOMC
MORE FROM BOND BUYER