Federal Reserve Bank of Cleveland President and CEO Loretta Mester said May 14 that further interest rate hikes are necessary to avoid an overheated economy.
Mester said she does not expect inflation to see a rapid increase anytime soon, which "argues against a steep path" on rate hikes from the Fed. Since December 2015, the central bank has been gradually lifting its benchmark federal funds rate after years of setting it at near-zero levels.
The gradual approach, she said, speaking at an event in Paris, looks to be the "best strategy" for the Fed to meet its goals and avoid financial stability concerns.
"In my view, it is appropriate to continue to remove some of the monetary policy accommodation to ensure that we avoid a buildup in risks to macroeconomic stability that could arise if the economy were allowed to overheat or a buildup of financial imbalances or risks to financial stability that could arise from the extended period of very low interest rates," she said in prepared remarks.
Mester said the labor markets "appear to be slightly beyond maximum employment" and will continue tightening further over the next two years. That, she said, has led to an overheated economy and an inflation spike in the past, pushing back against those who would support a "strategy to overheat the economy in an attempt to pull more people back into the workforce."
Inflation, she added, has seen a welcome uptick, with the latest figures showing the Fed's preferred inflation gauges around the central bank's 2% target. Mester said it is "too soon to say" that the Fed has met its inflation goal on a sustained basis, but she expects it to do so within the next year or two.
