Mester Con­tin­ues to See Need for Grad­ual In­crease

The Bond Buyer - - Market News - — Gary E. Siegel

Grad­ual rate hikes are likely to re­main nec­es­sary, and the nor­mal­iza­tion of the Fed­eral Re­serve’s bal­ance sheet should not cause a “sud­den or siz­able in­crease in longterm yields,” Fed­eral Re­serve Bank of Cleve­land Pres­i­dent Loretta Mester said Thurs­day.

“In my view, if eco­nomic con­di­tions evolve as an­tic­i­pated, I be­lieve fur­ther re­moval of ac­com­mo­da­tion via grad­ual in­creases in the fed funds rate will be needed and will help sus­tain the ex­pan­sion,” Mester told the Eco­nomic Club of Pitts­burgh, ac­cord­ing to pre­pared text re­leased by the Fed.

Since mone­tary pol­icy works with a lag, she said, “we can’t wait un­til these pol­icy goals are fully met to act. We need to as­sess what in­com­ing in­for­ma­tion is telling us about where the econ­omy is going over the medium run, and the risks around that medium-run out­look, and set pol­icy ap­pro­pri­ately.”

On bal­ance sheet nor­mal­iza­tion, Mester said, “I fa­vor do­ing this in the near fu­ture.” Since the plan has been pub­li­cized and will be a grad­ual re­duc­tion, she said it shouldn’t cause a spike in long-term yields.

“In­deed, in my view, other fac­tors, in­clud­ing the on­go­ing dis­cus­sions about the debt ceil­ing, ris­ing geopo­lit­i­cal ten­sions, and po­lit­i­cal un­cer­tainty, would be more likely to in­flu­ence Trea­sury yields in the near term,” she said.

The Fed’s moves to nor­mal­ize mone­tary pol­icy, she said, are “a wel­come ac­knowl­edg­ment that the econ­omy it­self has nor­mal­ized.”

In­fla­tion will be be­low the Fed’s 2% tar­get “for some­what longer” be­fore it will “grad­u­ally re­turn over the next year or so to our sym­met­ric goal of 2% on a sus­tained ba­sis.”

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