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Fed's Mester upbeat on inflation, path of tightening
February 19, 2016 / 1:47 PM / in 2 years

Fed's Mester upbeat on inflation, path of tightening

Cleveland Fed President Loretta Mester takes part in a panel convened to speak about the health of the U.S. economy in New York November 18, 2015. REUTERS/Lucas Jackson

SARASOTA, Fla. (Reuters) - Improving U.S inflation data and underlying strength in the economy should keep the Federal Reserve on track to gradually raise interest rates, Cleveland Federal Reserve President Loretta Mester said on Friday.

“My feeling is the path of interest rates to support the economy is going to be still one where we gradually reduce the amount of accommodation,” Mester told reporters following a speech at a Global Interdependence Center event in Sarasota, Florida.

Positive inflation data released earlier on Friday was “consistent” with her view that inflation would gradually return to the Fed’s 2-percent target, she said, even though it will remain “lower for longer” than previously thought.

She added that she thinks the Fed’s path is “not going backwards” and cautioned against negative interest rates, due to its potential impact on U.S. financial markets. The Fed could still buy more assets in a downturn and return to forward guidance, Mester noted.

Her upbeat assessment of the U.S. economy is at odds with an increasing number of Fed policymakers.

A fellow hawkish Fed voting member, St. Louis Fed President James Bullard, made an about-turn earlier this week when he said would be “unwise” to raise rates further given U.S. inflation data and global volatility.

Inflation, currently at 1.4 percent, has been below the Fed’s 2-percent target for the past four years. The Fed’s January policy meeting showed growing concern about a drop in inflation expectations, according to minutes published on Wednesday.

Earlier, in prepared remarks, Mester said “these more likely reflect changes in liquidity premia and inflation risk premia rather than changes in inflation expectations.”

She reiterated her view that while market volatility, low oil prices and the slowdown in China could hurt the U.S. economy, it was still “premature” to make a material change to her outlook.

“My current expectation is that the U.S. economy will work through this episode of market turbulence and the soft patch of economic data to regain its footing for moderate growth,” she said.

She noted, however that interest rates will remain accommodative “for some time” given slow growth abroad, the strong dollar, more restrictive financial conditions and the hard-hit energy sector.

Consumer spending had started the year “on a strong note,” Mester added, and would continue to be supported by low oil prices.

Investors do not currently expect the Fed to raise rates again this year, according to an analysis of fed funds futures contracts by the CME Group.

Fed officials hold their next policy meeting on March 15-16.

Reporting by Lindsay Dunsmuir; Editing by Chizu Nomiyama

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