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Cleveland Federal Reserve President Loretta Mester cautioned against waiting too long to raise interest rates while speaking in Chicago on Monday.
Ms Mester noted that the Fed’s decision to leave interest rates unchanged when it met last week, following a rate rise in March, are consistent with the gradual upward path of interest rates that the monetary policy setting Federal Open Market Committee has previously indicated.
However, she said it is important for the FOMC “to remain very vigilant against falling behind as we continue to make progress on our goals, especially given the low level of interest rates and the large size of our balance sheet.”
The Cleveland Fed head cautioned that putting off rate rises for too long could risk a recession.
We know that monetary policy affects the economy with long and variable lags, so policy actions have to be taken before our policy goals are fully met. If we delay too long in taking the next normalization step and then find ourselves in a situation where the labor market becomes unsustainably tight, price pressures become excessive, and we have to move rates up steeply, we could risk a recession.This is a bad outcome that disproportionately harms the more vulnerable parts of our society.
Ms Mester said she expects more than the one rate rise per year that the Fed has pushed through over the past two years. And the Fed’s so-called dot plot signals two additional rate rises this year. She added that normalising policy also includes taking steps to trim the Fed’s $4.5tn balance sheet and the reinvestment of proceeds of maturing Treasuries and the principal payments from agency debt and mortgage-backed securities.
“Ending reinvestments and beginning the journey toward a smaller balance sheet composed mainly of Treasury securities will be a welcome acknowledgment that the economy has entered normal times and policy is transitioning back to normal, too,” Ms Mester, said.