June 19, 2015 / 4:50 PM / 5 years ago

Mester says U.S. economy can now handle small Fed rate hike

Loretta Mester in Washington December 5, 2014. REUTERS/Gary Cameron

PITTSBURG, Pa. (Reuters) - The U.S. economy has now grown strong enough to absorb an interest rate hike of 0.25 percent, a top Federal Reserve policymaker said on Friday, adding the economy is “at or nearly at” full employment.

Speaking to reporters, Cleveland Fed President Loretta Mester cited recent labor market improvement, wage gains, stability in the dollar and oil prices, and expectations that inflation will start to rise as reasons for confidence.

“All those things together paint a picture to me that the economy can withstand a small rate increase,” said Mester, who has long called for an earlier tightening than many of her colleagues.

“I do think the economy can support a 25-basis-point increase in interest rates,” she added. “However I also understand the argument that getting a little more confirming data is reasonable as well.”

The U.S. central bank has kept interest rates near zero for 6-1/2 years to boost the economic recovery, and is looking to begin hiking rates later this year. After a policy meeting this week, the Fed published forecasts that showed disagreement among officials over whether to hike once, twice, or three times before year end.

Mester appears to be in the three-hike camp.

“I’m probably a little more optimistic about economic developments,” she said. “It’s hard to determine at this point how many rate increases but a gradual path up” is likely, she added.

Whether it’s “one, two, three rate increases (this year), we’re still going to be data dependent.”

Reporting by Jonathan Spicer; Editing by Meredith Mazzilli

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