Fed’s Mester sees US rate hikes for 2018 and 2019

The Federal Reserve policy maker, Loretta Mester has stated that the central bank should continue raising the interest rates for the remainder of this year and the year ahead.

She said that the rate hikes will help the U.S. economy from overheating which could cut short the economic expansion which has been growing with a steady momentum.

Loretta Mester, the President of the Cleveland Federal Reserve and is known to be a policy hawk said that the central bank has the option to either speed up or slow down the pace of rate hikes.

As an example she cited that if the U.S. trade tariffs on imports had a negative effect on the economy, the central bank could move at a slower pace.

“If the upside risks to growth come to pass, we may need to steepen the path a bit; if inflation surprises on the downside, we may need to go a bit slower,” Mester said.

Mester was one of the FOMC voting members who voted last week to raise interest rates by a quarter percentage point, as well as being one of the candidates considered by the White House as the next Fed’s vice-chair. She also gave her policy approach that was seen by many to be aggressive in the next few years.

Speaking about possible US rate hikes for 2018, at an event held at Princeton University, Mester said that “if the economy evolves as I anticipate, I believe further gradual increases in interest rates will be appropriate this year and next year.”

Mester added that the Fed must “avoid a build-up in risks to macroeconomic stability that could arise if the economy were allowed to overheat.”

The Federal Reserve had hiked interest rates in an expected move as it approved large tax cuts and the government spending measures that could push inflation expectations higher.

Officials are hopeful that consumer prices will rise above the Fed’s 2% inflation target rate in the near term. Based on the Fed’s views, the median forecasts currently point to three rate hikes this year and for the year ahead. For 2020, the Fed is expected to hike two more times.

Commenting on the U.S. tariffs on metals and on some Chinese goods imports, Mester said that these along with the re-negotiation of the North American Free Trade Agreement (NAFTA) could potentially pose economic risks to the United States.

The Fed Chair, Jerome Powell said that last week the tariff issues were discussed at the March FOMC meeting, but said that “there’s no thought that; changes in trade policy should have any effect on the current outlook.”

She however, said that the boost from fiscal spending could lift the nation’s GDP by 0.5 percent at the very least by next year. She said that the U.S. economy will continue to expand at a steady pace of 2.5%.

On the labour markets, Mester said that she had updated her forecasts on the unemployment rate as it reflected more labour slack than she had previously thought.

The markets continue to speculate on the rate hikes for this year. In the first two months, given the strong pace of job creation, increased speculation of four rate hikes in 2018 sent the markets into frenzy with the equity markets posting a correction.

However, after the jobs data showed that there was still significant amount of slack in the economy, economists now expect to see the gradual pace of wage growth over the near term while the U.S. unemployment rate is expected to fall further below the 4.0% threshold.