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* Mester to take reins at Cleveland Fed, has policy vote
* Has not taken hawkish stance alongside former boss Plosser
* Deep body of research into banks, financial intermediation
By Jonathan Spicer
CLEVELAND, May 30 The newest Federal Reserve
policymaker is probably not as hawkish as her background
suggests, and Loretta Mester's expertise in financial markets
and inflation could make a splash as the U.S. central bank
reverses its most accommodative policy experiment ever.
Mester, a Fed veteran of nearly three decades, becomes
president of the Federal Reserve Bank of Cleveland on Sunday
after stepping down as head of research at the central bank's
A review of her past research and interviews with colleagues
leave several questions on monetary policy unanswered. They
show, however, that she has not clearly staked out positions
alongside that of Charles Plosser, her boss at the Philadelphia
Fed who has long criticized the central bank's aggressive
Mester, 55, has published papers on inflation and
too-big-to-fail banks that could run against the grain at the
central bank, the review shows. Her deep body of research into
financial intermediation, meanwhile, could make hers a leading
voice as policymakers debate how to drain trillions of dollars
in Wall Street reserves in the years ahead.
Yet a relative dearth of published views on monetary policy
has left many investors and economists guessing how she will
vote at a central bank meeting on June 17-18.
"Her association with Philadelphia immediately raised
assumptions she was hawkish, but I don't think that's a good
reading," said Dana Saporta, a New York-based economist at
Credit Suisse. "Her record really doesn't give a clear signal so
for now we are marking her up as 'neutral'."
Americans will get their first real introduction to Mester
on Friday when she discusses inflation in a speech to close a
two-day conference at the Cleveland Fed. She has been in and out
of the bank since being named to the post Feb. 13, when she was
introduced to employees in the building's top-floor auditorium,
with its view of Lake Erie.
Mester, who replaces long-time centrist Sandra Pianalto,
will have a vote on the Fed's policy committee every other year,
a historical benefit granted to the heads of the Cleveland and
Chicago Fed banks. Other regional presidents vote every third
year except for the head of the New York Fed, who votes every
Interviews show she is well known and respected within the
central bank as one of its longest-serving research directors
and as a regular at policy meetings in Washington, where she
served a short stint in the Fed's powerful monetary affairs
Economists who regularly visit Philadelphia to discuss
policy have left with the impression that Mester, while on the
hawkish side of the spectrum, is not as ideologically opposed to
the Fed's aggressive accommodation as is Plosser, who has
strongly dissented against decisions in recent years to ramp up
bond purchases and to promise low rates for a long time.
"She seems to be someone who relies on evidence, not gut
feeling, so I'd expect her to set her own path on policy," said
Donald Kohn, a former Fed vice chair who is now a senior fellow
at Brookings Institution, a think tank.
The central bank is only now ramping down these purchases,
given unemployment is down to 6.3 percent from a recessionary
high of 10 percent. It will likely start to raise interest rates
some time next year, though the timing will hinge on whether
inflation firms and on any threats of asset-price bubbles.
In a 2009 speech that foreshadowed a debate that is now
growing louder, Mester said central bankers at times needed to
use rate hikes to pre-empt asset price bubbles.
"When there are a sufficient number of signs that financial
imbalances are building up, (such as) significant increases in
asset prices, credit growth, and leverage, policymakers should
consider using monetary policy even if these imbalances have not
yet affected current measures of inflation and output," she said
at the time.
Jeremy Stein, who retired just this week as a Fed governor,
has been pushing the idea the central bank should stand ready to
raise rates to head off risky asset bubbles in the future, a
stance that Fed Chair Janet Yellen has partly embraced.
Mester has also written that measures of so-called core
inflation - a favorite of many Fed policymakers because it
ignores volatile commodity prices - is not necessarily the best
predictor of total inflation.
Since earning her doctorate in economics from Princeton
University, Mester's resume has grown long.
She is a founding member or adviser of at least three
organizations focused on finance, and has scholarly papers
published on an array of topics like credit card lending, the
structure of central banks and the consolidation of private
Such financial expertise could be vital when the central
bank starts to raise rates and shrink its $4.3-trillion balance
sheet. It could also help with supervising Wall Street banks.
"Loretta is an economist who is an original and independent
thinker," said Joseph Hughes, an economics professor at Rutgers
University, citing findings he and Mester published on the cost
advantages that big banks enjoy above and beyond any investor
perceptions that the government would bail them out if needed.
"I would expect Loretta to bring an important perspective to
central banking involving issues of supervision and regulation,"
added Hughes, who has co-authored several papers with Mester
(Reporting by Jonathan Spicer; Editing by David Chance and