Reuters
The Federal Reserve needs to adjust its policy statement to acknowledge clear signs of US economic strength and, in particular, stop telling the world that interest rates won’t rise for a long while yet, a top Fed official said on Friday.
Cleveland Fed President Loretta Mester told Reuters in an interview she is more optimistic about the economy than most of her colleagues at the US central bank, and would probably be willing to tighten monetary policy sooner.
But as the Fed approaches a key policy meeting on December 16-17, she has not decided whether to dissent if the message remains too dovish for her taste.
“I really believe that our communications need to be adjusted based on what we’ve seen in the economy,” said Mester, who joined the Fed’s policy-making ranks in June and has so far backed its formal statements, including a reference that rates will likely not rise for a “considerable time.”
“I think that is really stale,” she said of the reference. “I don’t think that it can be in there.”
In only six months atop the Cleveland Fed, Mester, 56, has emerged as a leading voice on how to best telegraph policy intentions to the public and financial markets, with Fed Chair Janet Yellen naming her to a subcommittee on communications.
Her comments could set the stage for a long-awaited overhaul of the language the Fed uses to signal what would prompt a policy tightening after six years of rock-bottom rates.
Investors globally pore over even the smallest tweaks to Fed policy statements, which can ripple through financial markets.
Asked about the timing of tightening, Mester said only that she expects rates to rise from near zero “some time” next year, when she predicts currently low inflation to edge toward a 2% goal.
She said there was some evidence of wage strength in a report released earlier on Friday showing the strongest pace of jobs growth in nearly three years.
“I’m comfortable with the inflation situation,” Mester said. “I’d like to get it back up to goal, and I think it will go there gradually.”
The Fed’s 17 policymakers generally expect to lift borrowing costs around mid-2015, with the key fed funds rate rising above 1% by the end of that year, according to forecasts that will be updated at the meeting this month.
Mester, who is working on those updates, said the economy’s continued underlying strength has been apparent “for quite a while,” adding: “We need to make sure interest rates are calibrated” to that.
“I have ... been a bit more optimistic about the economy than others. I probably would be more willing to move rates up than some others,” she said after addressing bankers and regulators at a conference.
She acknowledged that raising rates too early risks hurting the recovery but argued that waiting too long could lead to a more aggressive tightening cycle that would contradict the Fed’s longstanding message that it will move slowly in coming years.
Mester previously was research head at the Philadelphia Fed under its hawkish president, Charles Plosser.
But a series of speeches in recent months on how to adjust Federal Reserve forecasts, the need for rules in policy-setting, and whether interest rates should be used to prick asset bubbles has suggested she is more of a centrist who wants to return to a normal policy stance as quickly and safely as possible.
She “is going to be influential by not necessarily being the loudest, but by making the arguments that will actually have a chance of swaying things,” JPMorgan economist Michael Feroli said.