If incoming data show the first-quarter slowdown was "transitory," a liftoff "relatively soon" would be appropriate, Federal Reserve Bank of Cleveland President and Chief Executive Officer Loretta J. Mester said Thursday.
"If it turns out that the incoming information shows that growth is regaining momentum after the first-quarter slowdown and more broadly supports my forecast, I would be comfortable with liftoff relatively soon," Mester told The Forecasters Club of New York, according to prepared text released by the Fed.
Noting the Federal Open Market Committee "has been appropriately cautious," she said a gradual increase in the Fed funds rate from zero would not stop the economic expansion, which is based on "improvement in underlying economic fundamentals."
Additionally, she said, raising rates would merely decrease "the degree of extraordinary policy accommodation; it doesn't mean tight policy. Headwinds are diminishing and above-trend growth is projected over the medium run. In this environment, the equilibrium real interest rate will be rising and the policy rate should rise with it."
Mester also noted the FOMC has stated normalization would be over a period of time, with gradual increases, which "allows for a recalibration of policy over time as some of the uncertainties surrounding the equilibrium interest rate, potential growth rate, and longer-run unemployment rate in the post-crisis world are resolved."
By moving "relatively soon," the FOMC ensure that a gradual approach would be possible. "A delay that's too long might risk having to move rates up more steeply in order to promote attainment of our goals over time," she said.
Also, delaying too long may "eventually pose risks to financial stability. Holding short rates at zero too long might spur excessive leverage or encourage investors to take on risks they are ill-equipped to manage in a search for yield."
