August 2, 2017 / 3:02 PM / 2 years ago

Mester backs Fed's resolve to tighten in face of weak inflation

FILE PHOTO: Cleveland Federal Reserve President and CEO Loretta Mester gives her keynote address at the 2014 Financial Stability Conference in Washington, U.S., December 5, 2014. REUTERS/Gary Cameron/File Photo

CINCINNATI, Ohio (Reuters) - The Federal Reserve should remain focused on gradually tightening U.S. policy because one-off factors, not a long-lasting trend, have caused inflation to weaken in recent months, a hawkish Fed official said on Wednesday.

Largely restating her views in the face of price measures that remained stubbornly low through June, Cleveland Fed President Loretta Mester backed the central bank’s telegraphing of roughly three rate hikes per year including one more in 2017.

The Fed would also need to soon start trimming its bond holdings, she said.

This she said “will help prolong the expansion, not curtail it,” while avoiding an overheated economy with investors making “excessively risky” bets that could destabilize the financial system.

Some of the inflation weakness reflects “the drop in the prices of prescription drugs and cell phone service plans,” said Mester, who regains a vote on policy next year under a rotation. “It may take a couple of months for these factors to work themselves through, but these types of price declines aren’t signaling a general downward trend in consumer prices.”

The message was largely in line with that of Fed Chair Janet Yellen, who signaled last month the central bank would not over-react to price readings that have left its preferred measure at 1.5 percent, below a 2 percent target. 

Reporting by Jonathan Spicer; Editing by Meredith Mazzilli

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