Fed's Mester retains mostly upbeat view of U.S. economy

[February 19, 2016]  By Lindsay Dunsmuir

SARASOTA, Fla. (Reuters) - The U.S. economy will get past a recent bout of market volatility and weak economic data but interest rates will likely need to remain accommodative for some time, Cleveland Federal Reserve President Loretta Mester said on Friday.

"My current expectation is that the U.S. economy will work through this episode of market turbulence and the soft patch of economic data to regain its footing for moderate growth," she said in prepared remarks at a Global Interdependence Center event in Sarasota, Florida.

Mester also said she still expects inflation to return to the Fed's 2-percent target, even though it will remain "lower for longer" than previously thought.

Her views put her at odds with an increasing number of Fed policymakers. A fellow hawkish Fed policymaker, St. Louis Fed President James Bullard, made an about-turn earlier this week saying it would be "unwise" to raise rates further given U.S. inflation data and global volatility.

Inflation, currently at 1.4 percent, has been below the Fed's 2-percent target for the past four years. The Fed's January policy meeting showed growing concern about a steady drop in inflation expectations, according to minutes published on Wednesday.

This is not a view to which Mester, a voting member of the Fed's rate-setting committee this year, subscribes.

"I take less of a signal from the downward moves in market-based measures of inflation compensation...these more likely reflect changes in liquidity premia and inflation risk premia rather than changes in inflation expectations," she said.

Mester acknowledged, however, that policy will likely need to remain accommodative "for some time" given slow growth abroad, the strong dollar, more restrictive financial conditions and the hard-hit energy sector.

She noted that the impact of China's slowdown on the global economy, market volatility and the risks of low oil prices need to be considered, but that it was still "premature" to make a material change to her outlook.

Consumer spending had started the year "on a strong note," Mester said, and would continue to be supported by low oil prices.

Fed officials hold their next policy meeting on March 15-16. Investors do not currently expect the Fed to raise rates again this year, according to an analysis of fed funds futures contracts by the CME Group.

(Reporting by Lindsay Dunsmuir; Editing by Chizu Nomiyama)

[© 2016 Thomson Reuters. All rights reserved.]

Copyright 2016 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.