Fed's Mester Sees Rates Slightly Higher This Year -- Update

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02/19/2019 | 05:05 pm

By Paul Kiernan

NEWARK, Del. -- The president of the Federal Reserve Bank of Cleveland said Tuesday that interest rates will likely rise slightly this year, assuming the economy grows at the healthy clip she anticipates.

"If the economy performs along the lines that I've outlined as most likely, the fed-funds rate may need to move a bit higher than current levels," said Cleveland Fed President Loretta Mester in a speech at the University of Delaware, referring to the central bank's benchmark policy rate.

Ms. Mester, who isn't a voting member of the rate-setting Federal Open Market Committee, painted 2019 as a transition year for both the U.S. economy and monetary policy.

The economy, which likely expanded close to 3% in 2018 thanks to recent tax cuts and spending increases, should slow to a more sustainable pace of growth this year.

Ms. Mester said she fully supported the Federal Reserve's current "wait-and-see" approach to rate increases after lifting borrowing costs four times in 2018 to a range between 2.25% and 2.5%.

"In my view, the most likely case is that this year, the economy will transition from above-trend growth to a somewhat slower pace," Ms. Mester said.

She noted she expects the economy to grow between 2% and 2.5% in 2019, the unemployment rate to remain "at or below 4%" and inflation to hover near 2%.

While U.S. economic fundamentals "remain sound," Ms. Mester highlighted "some crosscurrents and headwinds." Weakening confidence, recent financial market volatility, slowing growth in China and Europe and uncertainty surrounding Brexit and U.S. trade policy all present risks to the outlook, she said.

"If some of the downside risks to the forecast manifest themselves, and the economy turns out to be weaker than expected and jeopardizes our dual-mandate goals, I will need to adjust my outlook and policy views," Ms. Mester said.

With interest rates currently at the lower end of central bankers' estimates for where they will end up, the Fed has time to observe the economy's performance before making its next move.

"Monetary policy does not appear to be far behind or ahead of the curve, " Ms. Mester said. "This environment gives us the opportunity to continue to gather information on the economy and assess our medium-run forecast and the risks around that forecast, before making any further adjustments in the policy rate."

Among the indicators the Fed will be watching are official statistics, financial-market indicators, surveys on sentiment and anecdotal reports from business contacts.

Ms. Mester said she also expects the Fed to complete its plans for reducing its holdings of bonds and mortgage-backed securities "at coming meetings."

Write to Paul Kiernan at paul.kiernan@wsj.com

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