Mester: Situation in Ukraine considered for Fed’s policy

The eruption of the conflict unfolding in Ukraine could have an effect on the US economy in the medium term and should be factored in as Federal Reserve policymakers remove accommodation, Cleveland Fed President Loretta Mester said on Thursday.

The Fed official said she expects inflation will moderate this year as demand moderates and capacity constraints are resolved, but remain above 2% this year and next.

Such geopolitical events can worsen inflation and be damaging to economic growth in the near-term, said Mester, who has a vote this year for monetary policy decisions.

“The implications of the unfolding situation in Ukraine for the medium-run economic outlook in the US will also be a consideration in determining the appropriate pace at which to remove accommodation,” Mester said in remarks prepared for a virtual event organized by the Lyons Companies and the University of Delaware.

Mester reiterated her view that the pace of rate increases will depend on what happens with inflation, and that it should speed up if inflation does not moderate by the middle of the year and slow down if inflation comes down faster than expected.

Mester said that barring an “unexpected turn in the economy,” she still supports kicking off a series of interest-rate hikes in March, and starting to reduce the size of the central bank’s balance sheet soon.

“There are risks and uncertainty around the outlook, including those engendered by the geopolitical events unfolding today,” Mester said in prepared remarks for an event Thursday hosted by Lyons Companies and the University of Delaware. “My modal outlook continues to be that the strong economic expansion continues this year”.