Fed Doesn't Want to Surprise Market on Policy, Mester Says (2)

(Bloomberg) -- Federal Reserve Bank of Cleveland President Loretta Mester said policy makers don’t want to surprise the market on interest rates and they have to be “nimble” to adjust their outlook amid global and domestic risks.

“We certainly never want to surprise the markets,” Mester said Wednesday in an interview from Singapore with Bloomberg Television’s Haidi Lun. “But I think most people, when they’re thinking about the U.S. economy, see it on a pretty good and sound footing.”

Investor expectations for an interest-rate increase at the Fed’s next policy meeting rose after Chair Janet Yellen indicated Feb. 14 that she foresees additional tightening this year regardless of whether President Donald Trump follows through on plans to pursue pro-growth fiscal measures. Policy makers gather March 14-15 in Washington.

“We’ll just have to see how the economy plays out and assess the package when we get more details,” Mester said. “We have to be nimble about it in terms of being willing to change our policy path if we think that the economy is evolving differently than we anticipate.”

Global risks and uncertainty in the U.S. means the Fed may adjust its forecasts more frequently, Mester said.

“In a particular environment like this, we might see more changes in our forecasts and associated policy paths than we might have seen over the past couple of years,” she said. “But I think that’s good, we want policy to take into account these changes.”

Inflation Pressure

Mester reiterated comments made on Feb. 20 that she would be “comfortable” with higher rates in response to rising price pressures, though she said the Fed was not yet “behind the curve” in addressing inflation.

The Fed’s preferred gauge of inflation jumped to 1.6 percent in the 12 months through December, up from 1.4 percent in the year through November, though it remains below the Fed’s target of 2 percent. Excluding food and energy components, inflation was almost unchanged at 1.7 percent.

Wages have risen only modestly in recent months despite continued strong gains in the labor market where employers have added about 1.1 million jobs in the past 6 months, with unemployment already below 5 percent.

The Fed is scheduled to release Wednesday minutes from its most recent meeting, at which officials kept rates on hold. Derivatives traders are pricing in a 38 percent probability the U.S. central bank will act next month and a 60 percent chance it will tighten by its May meeting.

Mester was among Fed officials who pushed for higher rates through much of the second half of 2016. She dissented from majority votes twice last year, in September and November, when the Federal Open Market Committee held rates steady. The panel voted unanimously in December to raise the target range for the federal funds rate to 0.5 percent to 0.75 percent. Mester does not vote this year.

(Updates with futures pricing in 10th paragraph.)

To contact the reporters on this story: Netty Ismail in Singapore at nismail3@bloomberg.net, Melissa Cheok in Singapore at mcheok2@bloomberg.net, Alister Bull in Washington at abull7@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Brendan Murray at brmurray@bloomberg.net, Chris Bourke

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