Investors should focus more on the pace of US Federal Reserve tightening rather than the date of the first increase, Cleveland Fed President Loretta Mester said on Friday.
“In some sense, when exactly liftoff is — a meeting here or a meeting there — is probably not the right question,” she said in an interview in Boston.
Mester said she expects the benchmark federal funds rate to rise to 3.75 percent — the level that Fed officials forecast for the longer run — over the next three years.
“How slow or how fast we get there is really going to depend on the economy,” she said.
Underlining the divergence of opinions over the timing of the first rate increase since 2006, Boston Fed President Eric Rosengren said low inflation gives the central bank reason to bide its time.
“A patient approach to policy is prudent until we can more confidently expect that inflation will return to the Fed’s 2 percent target over the next several years,” Rosengren said in a speech in Boston, where he and Mester were attending the annual meeting of the American Economic Association. Both are set to vote on policy next year.
Rosengren’s language echoed the Dec. 17 statement of the Federal Open Market Committee, which said the Fed can be “patient” as it considers a rate increase. Fed Chair Janet Yellen later said that meant a move is unlikely before the end of April.
While policymakers last month affirmed their outlook for higher rates next year, they reduced their median forecast for the pace of tightening. They predicted the fed funds rate would rise to 1.125 percent at the end of this year, less than the 1.375 percent they foresaw three months earlier. The Fed has held rates near zero since December 2008.
San Francisco Fed President John Williams said two days after the December meeting that “June 2015 seems like a reasonable starting point for thinking about when liftoff could happen.”
Rosengren said that the precise date of liftoff makes little difference: “While market participants worry about whether liftoff will occur in April, June, or August, in fact most models imply that the macroeconomic implications of such differences are quite small.”
Mester said she expects the economy to expand by 3 percent this year and the inflation rate to move gradually higher toward the Fed’s 2 percent target after a temporary drop caused by a plunge in the price of oil.
“We’re getting much closer to our goals,” Mester, 56, said in the interview. “Given that, we want to bring the policy rate up.”
Unemployment in November stayed at a six-year low of 5.8 percent as employers boosted payrolls by the most in almost three years. The US economy added more jobs last year than any year since 1999. Most policymakers forecast unemployment of 5.2 percent to 5.5 percent in the long run.
On the other hand, inflation has lagged behind the Fed’s goal since April 2012. The Fed’s preferred gauge, the personal consumption expenditures price index, rose 1.2 percent in the year through November. The core figure, which strips out volatile food and energy costs, rose 1.4 percent.
“I believe the continued very low core inflation and wage growth numbers provide ample justification for patience,” Rosengren said in his speech.
Mester said more businesses in her district are considering increases to wages and benefits.
She added that the Federal Open Market Committee could damage the economy by raising rates either too slowly or too quickly.
“This is the quintessential monetary-policy question at turning points, how to make sure you don’t go too early or too late,” she said.
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