Mester, a Fed veteran of nearly three decades, becomes president of
the Federal Reserve Bank of Cleveland on Sunday after stepping down
as head of research at the central bank's Philadelphia branch.
A review of her past research and interviews with colleagues leave
several questions on monetary policy unanswered. They show, however,
that she has not clearly staked out positions alongside that of
Charles Plosser, her boss at the Philadelphia Fed who has long
criticized the central bank's aggressive crisis-era stimulus.
Mester, 55, has published papers on inflation and too-big-to-fail
banks that could run against the grain at the central bank, the
review shows. Her deep body of research into financial
intermediation, meanwhile, could make hers a leading voice as
policymakers debate how to drain trillions of dollars in Wall Street
reserves in the years ahead.
Yet a relative dearth of published views on monetary policy has left
many investors and economists guessing how she will vote at a
central bank meeting on June 17-18.
"Her association with Philadelphia immediately raised assumptions
she was hawkish, but I don't think that's a good reading," said Dana
Saporta, a New York-based economist at Credit Suisse. "Her record
really doesn't give a clear signal so for now we are marking her up
Americans will get their first real introduction to Mester on Friday
when she discusses inflation in a speech to close a two-day
conference at the Cleveland Fed. She has been in and out of the bank
since being named to the post Feb. 13, when she was introduced to
employees in the building's top-floor auditorium, with its view of
Mester, who replaces long-time centrist Sandra Pianalto, will have a
vote on the Fed's policy committee every other year, a historical
benefit granted to the heads of the Cleveland and Chicago Fed banks.
Other regional presidents vote every third year except for the head
of the New York Fed, who votes every year.
Interviews show she is well known and respected within the central
bank as one of its longest-serving research directors and as a
regular at policy meetings in Washington, where she served a short
stint in the Fed's powerful monetary affairs division.
Economists who regularly visit Philadelphia to discuss policy have
left with the impression that Mester, while on the hawkish side of
the spectrum, is not as ideologically opposed to the Fed's
aggressive accommodation as is Plosser, who has strongly dissented
against decisions in recent years to ramp up bond purchases and to
promise low rates for a long time.
"She seems to be someone who relies on evidence, not gut feeling, so
I'd expect her to set her own path on policy," said Donald Kohn, a
former Fed vice chair who is now a senior fellow at Brookings
Institution, a think tank.
The central bank is only now ramping down these purchases, given
unemployment is down to 6.3 percent from a recessionary high of 10
percent. It will likely start to raise interest rates some time next
year, though the timing will hinge on whether inflation firms and on
any threats of asset-price bubbles.
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In a 2009 speech that foreshadowed a debate that is now growing
louder, Mester said central bankers at times needed to use rate
hikes to pre-empt asset price bubbles.
"When there are a sufficient number of signs that financial
imbalances are building up, (such as) significant increases in asset
prices, credit growth, and leverage, policymakers should consider
using monetary policy even if these imbalances have not yet affected
current measures of inflation and output," she said at the time.
Jeremy Stein, who retired just this week as a Fed governor, has been
pushing the idea the central bank should stand ready to raise rates
to head off risky asset bubbles in the future, a stance that Fed
Chair Janet Yellen has partly embraced.
Mester has also written that measures of so-called core inflation -
a favorite of many Fed policymakers because it ignores volatile
commodity prices - is not necessarily the best predictor of total
Since earning her doctorate in economics from Princeton University,
Mester's resume has grown long.
She is a founding member or adviser of at least three organizations
focused on finance, and has scholarly papers published on an array
of topics like credit card lending, the structure of central banks
and the consolidation of private banks.
Such financial expertise could be vital when the central bank starts
to raise rates and shrink its $4.3-trillion balance sheet. It could
also help with supervising Wall Street banks.
"Loretta is an economist who is an original and independent
thinker," said Joseph Hughes, an economics professor at Rutgers
University, citing findings he and Mester published on the cost
advantages that big banks enjoy above and beyond any investor
perceptions that the government would bail them out if needed.
"I would expect Loretta to bring an important perspective to central
banking involving issues of supervision and regulation," added
Hughes, who has co-authored several papers with Mester since 1993.
(Reporting by Jonathan Spicer; Editing by David Chance and Chizu
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