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Cleveland Federal Reserve President Loretta Mester higher rates are likely later this year

February 19, 2019 by Jason Shortes

Original Source Cleveland Federal Reserve:

According to the words of Cleveland Federal Reserve President, Loretta Mester, on Tuesday, there is a need for the United States Federal Reserve to increase the interest rates in 2019 but raised concerns that it could lead to an end of its concerted efforts to reduce its significant bond portfolio before the end of the year.

For instance, the comments from Ms. Mester exhibit the complication of the United States central bank’s attempts to create new standards for the formulation of monetary policy at a period when the economic perspective looks gloomy.

As an advocate of increased interest rates, Ms. Mester also supported the decision of the Fed in the previous month to eliminate guidance in its policy statement on the next move of the agency if it will lead to a decrease or increase in interest rates. She also confirmed that the elimination of the rate guidance from the Fed’s policy statement is a movement of the Fed to what she termed as a “normal” policy.

However, she is hopeful that the economy will maintain its stable outlook irrespective of the hazards to its development such as a global economic slowdown and the prevalent trade negotiations between China and the United States of America. In an interview with reporters in Newark, Delaware, Ms. Mester said there is a likelihood that the interest rates will be slightly increased in the latter part of this year.

She also maintained that she hopes that the Fed could put an end to its process of pruning its bond holdings by the end of the year 2019.

In the wake of 2007-09 recessions, the balance sheet of the Fed increased to more than $4 trillion, and this led to policymakers to start the process of lowering bond holdings in the concluding months of 2017.

According to some financial market analysts, the reduction of the balance sheet is responsible for the contraction of monetary policy and Ms. Mester confirmed that the procedure is partly the reason for a rising pressure on longer-term interest rates.

Ms. Mester does not believe in the fact that eliminating the balance sheet reduction procedure will improve the fortunes of the economy. In her words, she said that she does not think the balance sheet would have a significant effect on the economy. In this year’s meeting of the Fed committee that set policies, Mester does not have a vote irrespective of the fact that she is a participant in the discussions of the central bank.

Mester held on to her opinion that she would love the Fed to keep Treasury securities only and approve an idea that would support a portfolio subjective towards shorter-term maturity dates.

The Fed is decreasing the balance sheet by not investing the entire proceeds of its maturing securities again. Previously in the day, the comments of Ms. Mester on a panel at the University of Delaware posited that she is in support for the idea of decelerating the balance sheet reduction procedure. In an interactive session with reporters, Mester said she thought the Fed could put an end to its efforts at the reduction of balance sheet reduction in one stage.

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