Cleveland Federal Reserve Chairman Loretta Mester said that a shrinking economic outlook could mean that the central bank had to raise interest rates stronger than expected, and that by 2020 interest could exceed the “neutral level” of 3%.
“With a fiscal policy that shifts from restrictive to stimulating, with an economy rising above the trend and rising investment, the short-term equilibrium rate should also rise”, said Loretta Mester. In her view, the possibility of a higher level of interest rates, which is neither stimulating nor restricting growth (the so-called “neutral interest rate”), means that there may be changes in the long-term perspective of the Fed’s monetary and interest rate politics.
Loretta Mester has the right to vote at Federal Reserve sessions this year, and she strongly supports raising interest rates.
The latest rise in interest rates ranging from 1.5% to 1.75% occurred at a March meeting when central bankers confirmed they expected at least two more interest rate increases by the end of this year. The series of robust data on the labor market situation in the United States and rising price pressure signals some analysts, economists and financial market participants to suggest that the Federal Reserve may increase three times interest rates in 2018.
Meanwhile, Loretta Mester remains optimistic about the near future.
“The US economy is performing very well and I expect it to continue in the future, expecting higher production growth, continuing labor market growth and inflation over the next year”, she said. According to her, the labor market probably exceeded the so-called “full employment”, while inflation will move steadily to the Fed target of 2% in the next year or two.
“In such an environment, the Federal Reserve should continue with the policy of raising interest”, said Loretta Mester. “In view of the ongoing economic expansion, it may be that in order to maintain our policy goals (full employment and sustainable inflation of around 2%), it may be necessary for the interest rate level to rise for some time slightly above its long-term level”, added she.
It should be borne in mind that the average forecast of Fed members is for long-term or neutral interest rates of 3%. According to Loretta Mester, the latest forecasts by central bankers indicate that interest rates could rise to more than 3% in 2020. At this stage, however, it suggests that the Federal Reserve should keep its way to continued gradual increases in interest rates as there is still no sharp rise in US inflation.