Tags: Federal Reserve | Mester | Rate | Tightening

Fed's Mester: Pace of Tightening More Important Than Liftoff Date

Saturday, 03 January 2015 05:42 PM

Federal Reserve Bank of Cleveland President Loretta Mester said that while interest rates could rise in the first half of this year, the pace of tightening is more important than the date of the initial increase.

“In some sense, when exactly liftoff is — a meeting here or a meeting there — is probably not the right question,” she said in an interview in Boston.

Mester, who doesn’t vote on policy this year, said she expects the benchmark federal funds rate to rise to 3.75 percent — the level that Fed officials forecast for the longer run — over the next three years. “How slow or how fast we get there is really going to depend on the economy,” she said.

Policy makers last month reduced their median forecast for the pace of tightening next year. At the same meeting, the Federal Open Market Committee said it will be “patient” in considering the timing of the first increase since 2006 — with Chair Janet Yellen later saying that meant a move is unlikely before the end of April.

Central bankers differ on the likely timing of an increase. John Williams, president of the San Francisco Fed, said two days after the December meeting that “June 2015 seems like a reasonable starting point for thinking about when liftoff could happen.”

Mester said she expects the economy to expand at a 3 percent pace this year and the inflation rate to move gradually higher toward the Fed’s 2 percent target after a temporary drop caused by a plunge in the price of oil.

‘Much Closer’

“We’re getting much closer to our goals,” Mester, 56, said in the interview in Boston, where she is attending the annual meeting of the American Economic Association. “Given that, we want to bring the policy rate up.”

Unemployment in November stayed at a six-year low of 5.8 percent as employers boosted payrolls by the most in almost three years. The economy added more jobs in 2014 than any year since 1999. Most policy makers forecast unemployment of 5.2 percent to 5.5 percent in the long run.

On the other hand, inflation has lagged behind the Fed’s goal since April 2012. The Fed’s preferred gauge, the personal consumption expenditures price index, rose 1.2 percent in the year through November.

Wage Increases

Even so, Mester said more businesses in her district, which encompasses Ohio, western Pennsylvania and parts of West Virginia and Kentucky, are considering increases to wages and benefits. “Firms are getting more comfortable thinking about raising wages,” she said.

Mester, who won’t vote again on the committee until 2016, said the FOMC could damage the economy by raising rates either too slowly or too quickly.

“This is the quintessential monetary-policy question at turning points, how to make sure you don’t go too early or too late,” she said.

Mester said there have been some “false starts” in the economy since the 2008 financial crisis, which has prompted some economists to argue the Fed should err on the side of caution.

“On the other hand, we may be underestimating the cost of delaying,” Mester said. “The costs on both sides are high.”

Congress should resist measures that would compromise the Fed’s independence in forming monetary policy, Mester said.

Senator Rand Paul, a Republican from Kentucky, has long called for a so-called “audit the Fed” bill.

“Audit the Fed is a misnomer,” Mester said. “What they are trying to do is influence monetary policy decisions, and that has a dark side.”

Congressional influence on monetary policy, she said, would result in “decisions that aren’t in the best interest of the economy.”

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Federal Reserve Bank of Cleveland President Loretta Mester said that while interest rates could rise in the first half of this year, the pace of tightening is more important than the date of the initial increase.
Federal Reserve, Mester, Rate, Tightening
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2015-42-03
Saturday, 03 January 2015 05:42 PM
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