Fed’s Mester Supports Rate Increase In March

Loretta J. Mester, president and CEO of the Federal Reserve Bank of Cleveland, is crossing the wires and has stated that there’s a strong case to start reducing accommodation and she supports rate increase in March.

Key Remarks

Future rate increases will be guided by the economy.

If inflation is not coming down by the middle of the year then the Fed will need to remove accommodation at a faster pace.

The fed can move considerably faster to shrink balance sheet than it has in the past

The fed will be careful with balance sheet plan to not disrupt financial markets.

Having inflation be under control is going to help the fed sustain the expansion.

Mester doesn’t see a compelling case to start with a 50 bp rate increase.

That is something the committee is going to have to talk about and decide.

Each meeting is going to be in play.

Mester suspects the fed will need to get interest rates above neutral but doesn’t see an immediate need to do that.

The balance sheet is not the Fed’s primary policy tool.

She expects the fed will set the balance sheet on a path to reduce it and use the Fed funds rate as the main policy tool.

As balance sheet runs down that will remove some accommodation.

Sales of MBS would need to be done carefully to not disrupt the markets.

The Fed is still talking about what the actual balance sheet plan would look like.

The Fed would not necessarily sell mortgage-backed securities from the start.

Active sales would come later.

It’s important the fed return to a primary treasury portfolio.

With the economy doing well it’s time to start reducing the balance sheet.

Mester’s view on bond sales might change as time goes on.

US dollar on the backfoot

As for market’s reaction after Mester’s comments, the US dollar is on the backfoot in New York trade as measured by the DXY index against a basket of currencies. It is losing some 0.23% during the North American session.