Fed’s Mester says rates may need to rise if U.S. growth stays on track

(Reuters) – The Federal Reserve’s new wait-and-see approach to monetary policy is suitable for now, Cleveland Fed President Loretta Mester said Monday, but the central bank may need to raise interest rates a bit further if the economy does as well as she expects.

The Fed last week left its target range for short-term interest rates unchanged at between 2.25 percent and 2.5 percent, and in what was widely viewed as a dovish shift said it would be “patient” in making any further adjustments to borrowing costs.

Mester, in remarks prepared for delivery in Cleveland, said she supported that decision, calling it “well-calibrated” to the economic outlook.

The economy is in her view in “a very good spot,” and is likely to grow at between 2 percent and 2.5 percent this year, slower than last year but still fast enough to keep unemployment at its current level of 4 percent or lower. Inflation, she predicted, would be close to the Fed’s 2-percent target.

“If the economy performs along the lines that I’ve outlined as most likely, the fed funds rate may need to move a bit higher than current levels,” she said in her prepared remarks. 

But risks remain, including uncertainty over trade policy, slowing global growth, tighter financial conditions and a downturn in household confidence.

“If some of the downside risks to the forecast manifest themselves, and the economy turns out to be weaker than expected and jeopardizes our dual mandate goals, I will need to adjust my outlook and policy views,” Mester said.

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