Fed's Mester Sees 'Compelling' Case for Rate Hikes
An escalating trade war with retaliatory tariffs could pose a risk to the economy and would also potentially boost inflation.
Federal Reserve Bank of Cleveland President Loretta Mester said the case for raising interest rates is “pretty compelling” given the economy’s strength, reinforcing expectations that the central bank will boost borrowing costs at its next meeting in September.
“We have an economy that’s growing above trend, we have low unemployment and we have inflation at basically our goal of 2%,” Mester said in a Bloomberg Television interview with Michael McKee on Friday as the central bank’s annual policy symposium in Jackson Hole, Wyoming, gets under way. “This gradual increase in rates seems to be a very compelling case right now, given that we are accommodative still on monetary policy.”
She downplayed concern that the flattening Treasury yield curve signals that the U.S. is approaching a recession, as it has indicated in previous expansions. Other reasons for the narrower gap between short-term and long-term rates include demand for safe assets such as Treasuries, as well as bond purchases by central banks around the world, Mester said.
An escalating trade war with retaliatory tariffs could pose a risk to the economy and would also potentially boost inflation, she said.
In contrast to Mester’s views on the yield curve, St. Louis Fed President James Bullard, an outlier in his view that the U.S. central bank shouldn’t be raising interest rates, said the Fed should heed the signals from the bond market and dial down the urgency to be preemptive against fighting inflation.
“There is no reason to challenge the yield curve at this time,” he said earlier Friday in a Bloomberg TV interview with McKee. “Inflation is low, it is stable, it is barely up to target. We don’t need to be preemptive on the yield curve.”
Bullard votes next year on the policy-setting Federal Open Market Committee. Mester votes in 2018.
The regional Fed chiefs spoke just before remarks from Chairman Jerome Powell due at 10 a.m. New York time. He won’t be joined by his European Central Bank and Bank of Japan counterparts at this year’s Jackson Hole confab, with Mario Draghi and Haruhiko Kuroda’s names both missing from the list of attendees.
Other highlights from the attendee list include confirmation that none of the ECB’s executive board members will make the trip to the central-banking retreat in Wyoming’s Grand Teton National Park.
Policy makers gather against a backdrop of strong U.S. growth though the global economic outlook is less rosy. President Donald Trump’s trade war threatens China, while Turkey and other vulnerable emerging markets have been buffeted by financial market turmoil. Trump has also turned his ire on the Fed chief, who he picked, for raising interest rates.
Powell will be joined by both current Fed governors, Lael Brainard and Randal Quarles, as well as Fed governor nominee Marvin Goodfriend. All 11 current regional Fed presidents will be there. The San Francisco Fed has a vacancy at the top.
Investors will focus on Powell’s speech on monetary policy in a changing economy for confirmation of an interest-rate increase at September’s meeting of the Federal Open Market Committee. Trump might complain about rate hikes, but minutes released Wednesday of U.S. central bankers’ policy deliberations at their last meeting showed they were on track to move in September.