By Michael S. Derby
NEW YORK (Reuters) - Cleveland Federal Reserve President Loretta Mester said on Wednesday that an easing of inflation pressures has given the U.S. central bank time to decide the next move in its monetary policy path.
"While it is still above our 2 percent goal, there has been discernible progress on inflation even while the overall economy has remained relatively strong," Mester said in the text of a speech prepared for delivery before a conference on financial issues in Chicago.
It will likely take time to hit the Fed's inflation target, Mester said, but in the meantime, "monetary policy is in a good place for policymakers to assess incoming information on the economy and financial conditions." The central bank's rate policy will need to be "nimble" and "I believe the current level of the (federal) funds rate positions us well to do that."
Mester did not close the door to more rate hikes and said the prospect of additional increases and how long the central bank's rate target will remain high "will depend importantly on whether the economy is evolving as expected, how the risks are changing, and the progress being made on our dual mandate goals of price stability and maximum employment."
Mester, who will retire from the regional Fed bank next June, spoke two weeks ahead of the Fed's Dec. 12-13 policy meeting. That gathering is widely expected to result in no change in the current 5.25%-5.50% policy rate range. Financial markets overwhelmingly believe the Fed is done with its current cycle of rate hikes - a number of Fed officials have also suggested no more increases are likely - and are now placing bets on when they believe the central bank will cut rates.
Mester noted in her remarks that "we are operating in an uncertain economic environment" and it is unclear how restrictive monetary policy is, and how much of the past tightening has yet to flow through the economy.
She noted that Fed rate hikes have tightened financial conditions and moderated demand at a time when supply chains have been healing. She also said, "economic activity and employment growth have slowed, although they have remained more resilient than most forecasters, including FOMC (Federal Open Market Committee) participants, had expected earlier this year."
Much of Mester's prepared remarks focused on financial stability concerns, where she said regulators should take action to increase the resiliency of financial firms. To that end, Mester called for standards that would bolster banks' capital buffers.
She also called for bank oversight that looks at the market value of banks' balance sheets rather than their book value. Mester said the acute stress seen in U.S. banks earlier this year was largely over, but the factors that caused it remain.
Mester also said that Fed stress testing of banks "should be redesigned with an eye to making them a more effective countercyclical capital tool, so that banks would need to build up their capital buffers when they are better able to do so."