May 4, 2019 / 12:15 AM / 21 days ago

Fed's Mester says inflation expectations stable, economy at an 'equilibrium'

SAN FRANCISCO (Reuters) - The Federal Reserve has not lost credibility in its promise to keep inflation around 2 percent, despite a recent drop in the pace of price increases and a longstanding shortfall from its goal, Cleveland Federal Reserve Bank President Loretta Mester said on Friday.

FILE PHOTO: Loretta Mester, president of the Federal Reserve Bank of Cleveland, speaks during an interview in Manhattan, New York, U.S., August 15, 2017. Picture taken August 15, 2017. REUTERS/Shannon Stapleton

Inflation expectations, she said, remain stable, and show no sign that businesses or households have lost faith that the Fed will let inflation slip, she said, rebutting perhaps the main argument of policymakers who feel interest rates should be cut soon.

“I don’t see much evidence that inflation expectations are moving down. They have been relatively stable,” she said in an interview with Reuters at a monetary policy conference. “I don’t see a compelling case that we have lost credibility on the inflation target.”

Mester said she sees risks to her outlook for economic growth of 2 to 2.5 percent as balanced, and with job growth continuing there seemed no reason to consider raising or lowering rates.

The recent performance of the economy “kind of tells you we are in an equilibrium. ... There is no real compelling reason to move from where we are,” she said.

The Fed earlier this week kept interest rates steady at their current range of between 2.25 and 2.5 percent. Investors had expected a signal the Fed might reduce rates in coming months after new data showed inflation, excluding volatile food and energy prices, running at around 1.6 percent, below the Fed’s 2 percent goal.

It has been roughly the same since the Fed set that 2 percent goal in 2012, though for much of that time the economy was recovering from the severe 2007 to 2009 recession and unemployment was high.

The Fed was near its target for much of last year.

Mester said she did not expect the recent decline in inflation to last and did not think the Fed should respond to it - a view shared by top officials including Fed Chair Jerome Powell and Vice Chair Richard Clarida. Some of her colleagues have suggested the Fed may need to cut rates to show it is serious about hitting the 2 percent goal, or risk a blow to its credibility.

“I am not one of these people who say, Oh, we got that reading of 1.6 and we have to do something about it,” she said.

Reporting by Howard Schneider

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