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Fed's Mester: Rates Should Rise 'Soon' Amid Labor Gains

Wednesday, 04 February 2015 02:03 PM

Federal Reserve Bank of Cleveland President Loretta Mester said interest rates should be raised “soon” amid mounting economic momentum, “significant improvement” in labor markets, and the boost consumers will get from cheaper fuel.

The improvement in the world’s largest economy is likely to be sustained as headwinds that held back the expansion abate, she said today in a speech in Columbus, Ohio. Mester said she would be “comfortable with liftoff in the first half of this year” and she sees inflation gradually rising back to the Fed’s 2 percent target.

“There are accumulating signs that the economy is building momentum,” said Mester, who doesn’t vote this year on the Federal Open Market Committee. “It will soon be appropriate to begin moving rates up from zero. Because policy must be forward looking, in my view liftoff should occur before our goals are fully met.”

Policy makers led by Chair Janet Yellen are weighing when to raise rates they’ve kept near zero since December 2008. They must reconcile how faster economic growth and the strongest job gains since 1999 are offset by inflation that has persisted below their 2 percent goal for almost three years.

“Inflation will gradually move back up to 2 percent by the end of next year as economic activity continues to strengthen, oil prices stabilize, and inflation expectations remain anchored,” Mester said. Continued low inflation has “the potential to unsettle estimates of inflation expectations, so it is important that we carefully monitor developments on this front.”

Low Inflation

Inflation been curbed as oil prices plunged by more than half since June. The Fed’s preferred measure of price increases, based on personal consumption expenditures, climbed at a 0.7 percent pace in December compared to the same month a year before, the slowest rate since late 2009. The gauge hasn’t exceeded the central bank’s 2 percent target since March 2012.

The labor market is tightening. The jobless rate ended last year at a six-year low of 5.6 percent, near what Fed officials consider full employment. U.S. employers added almost 3 million jobs last year, the strongest pace in 15 years.

Still, wage gains have lagged behind the pace of employment growth. Average hourly earnings for all employees increased 1.7 percent over the 12 months ended in December, the smallest gain since October 2012.

Subdued Wages

Mester said while “wage growth has remained subdued” despite gains in labor markets, she anticipates “wages will accelerate and help support stronger consumer spending” as employment continues to grow.

“The U.S. economy is in better shape than the economies of many of our trading partners,” Mester said today to the Ohio Bankers League Economic Summit. “Weak demand from abroad will dampen U.S. exports but will be more than offset by healthy domestic consumer and business spending that will support above- trend economic growth this year.

Mester also said proposals by U.S. lawmakers to audit Fed policy making are ‘‘misguided because they really are about allowing political considerations to influence monetary policy decisions.’’

Such proposals also are ‘‘misnamed’’ because the Fed is already ‘‘subject to many audits of its financial statements and activities, and Chair Yellen regularly testifies before Congress on monetary policy,’’ she said.

Senator Rand Paul has re-introduced legislation proposing to audit Fed monetary policy. Twenty-nine Republican senators are co-sponsors of the bill, along with one Democrat.

Mester, 56, was appointed in June to lead the Cleveland reserve district, which includes Ohio, western Pennsylvania, eastern Kentucky and parts of West Virginia. She previously was research director of the Philadelphia Fed. She did not dissent last year as a voter on the FOMC, which she re-joins next year.

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Federal Reserve Bank of Cleveland President Loretta Mester said interest rates should be raised "soon" amid mounting economic momentum, "significant improvement" in labor markets, and the boost consumers will get from cheaper fuel.
federal reserve, rates, mester, jobs
Wednesday, 04 February 2015 02:03 PM
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