Look at pace of US interest rate hikes, not timing, advises Federal Reserve figure

Cleveland Federal Reserve Bank President and CEO Loretta Mester gives her keynote address at the 2014 Financial Stability Conference in Washington on Dec 5, 2014. -- PHOTO: REUTERS
Cleveland Federal Reserve Bank President and CEO Loretta Mester gives her keynote address at the 2014 Financial Stability Conference in Washington on Dec 5, 2014. -- PHOTO: REUTERS

WASHINGTON (Bloomberg) - Investors should focus more on the pace of US Federal Reserve interest rate hikes rather than the date of the first rise, said Loretta Mester, president of the Cleveland Fed.

"In some sense, when exactly liftoff is - a meeting here or a meeting there - is probably not the right question," she said in an interview in Boston.

Mester said she expects the benchmark federal funds rate to rise to 3.75 per cent - the level that Fed officials forecast for the longer run - over the next three years. "How slow or how fast we get there is really going to depend on the economy," she said.

Underlining the divergence of opinions over the timing of the first rate increase since 2006, Boston Fed President Eric Rosengren said low inflation gives the central bank reason to bide its time.

"A patient approach to policy is prudent until we can more confidently expect that inflation will return to the Fed's 2 per cent target over the next several years," Rosengren said in a speech in Boston, where he and Mester were attending the annual meeting of the American Economic Association. Both will vote on policy next year.

Rosengren's language echoed the Dec 17 statement of the Federal Open Market Committee, which said the Fed can be "patient" as it considers a rate increase. Chair Janet Yellen later said that meant a move is unlikely before the end of April.

While policy makers last month affirmed their outlook for higher rates next year, they reduced their median forecast for the pace of tightening.

They predicted the fed funds rate will rise to 1.125 per cent at the end of 2015, less than the 1.375 per cent they foresaw three months earlier. The Fed has held rates near zero since December 2008.

Williams View John Williams, president of the San Francisco Fed, said two days after the December meeting that "June 2015 seems like a reasonable starting point for thinking about when liftoff could happen." Rosengren argued that the precise date of liftoff makes little difference.

"While market participants worry about whether liftoff will occur in April, June, or August, in fact most models imply that the macroeconomic implications of such differences are quite small," he said.

Mester said she expects the economy to expand at a 3 per cent pace this year and the inflation rate to move gradually higher toward the Fed's 2 per cent target after a temporary drop caused by a plunge in the price of oil.

"We're getting much closer to our goals," Mester, 56, said in the interview. "Given that, we want to bring the policy rate up."