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Mester: Fed could review monetary policy framework later this year

The head of the Federal Reserve Bank of Cleveland said a review of the central bank's policy approach to controlling inflation is appropriate now that the economy is back to normal and a smooth transition to new Fed leadership was underway.

Loretta Mester cautioned, however, that the bar should be high for moving to an alternative method.

Demographic changes affecting labor force participation may weigh on long-term economic growth and keep interest rates lower for longer, Mester said in remarks prepared for delivery at the U.S. Monetary Policy Forum in New York on Feb. 23.

"The expected slowdown in population growth and labor force participation rates due to changes in demographics will weigh on long-run economic growth, the natural rate of unemployment, and the longer-term equilibrium interest rate," she said.

These factors could affect how the Fed approaches raising rates in response to inflation so that it would have more room to lower them again during an economic slowdown, Mester said. The goal would be to control inflation through rates, rather than resorting to extraordinary monetary measures, she said.

"There is little experience with alternative frameworks because the central banks of most advanced economies like the U.S. have used some form of inflation targeting," she said.

Mester is reportedly under consideration for the open vice chair position at the Fed by the Trump administration.