Mester Continues to See Need for Gradual Increase
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.”