Fed's Mester sees scope for U.S. rates to move 'a bit higher'

FILE PHOTO: Loretta Mester, president of the Federal Reserve Bank of Cleveland, speaks during an interview in Manhattan, New York, U.S., August 15, 2017. REUTERS/Shannon Stapleton/File Photo

COLUMBUS, Ohio (Reuters) - Interest rates may need move “a bit higher” if the U.S. economy performs as expected and dodges fears of a global slowdown, a Federal Reserve policymaker said on Thursday.

Federal Reserve Bank of Cleveland President Loretta Mester said in a speech that she backed the central bank keeping interest rates steady for the moment between 2.25 and 2.5 percent, with “no urgency” to make any changes now.

But she said she expects a slowdown in the U.S. economy this year and shown in recent economic data from factory activity to business and consumer confidence and inflation to be “temporary.”

“I am biased to either keeping rates where they are or moving them up a little bit,” Mester told reporters after the speech at a banking regulation event in Columbus, Ohio.

“If my likely outcome comes to pass then I think rates might have to go up a bit from where they are. But as you know the economy could evolve in a different way than I’m expecting as my most likely outcome.”

Several Fed policymakers have in recent days used speeches and interviews to battle a view growing in financial markets, and embraced by the Trump administration, that the central bank will need to cut rates before long.

Mester, who is not voting on the central bank’s policy this year but takes part in the deliberations, also said the Fed will be making decisions on how to transition its $4 trillion in assets to mainly U.S. Treasuries “at upcoming meetings.” The bank bought trillions of mortgage-backed securities in the aftermath of the financial crisis to stimulate the economy.

Mester said business contacts in the district covered by her bank, which spans Ohio as well as parts of Pennsylvania, Kentucky and West Virginia, report that business has picked up after slowing late last year. That strength could offset a slowdown she sees in Europe and China.

But uncertainty over U.S.-China trade talks could still weigh on business spending, she said. China and the United States are in intense negotiations to end a months-long trade war that has rattled global markets. Washington wants sweeping changes to China’s economic and trade policies, while Beijing wants Trump to lift expensive sanctions on Chinese goods.

Reporting by Trevor Hunnicutt; Editing by Chizu Nomiyama