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Fed district chief: Message on rates 'stale'

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Federal Reserve Bank of Cleveland
Loretta J. Mester, president and chief executive officer of the
Friday, Sept. 5, 2014, 12:01 a.m.

The economy is headed toward full recovery and unemployment should be down to 5.5 percent nationally by the end of next year, the president of the Federal Reserve Bank of Cleveland said on Thursday.

But “more progress needs to be made” toward full employment, Loretta Mester said during a noontime speech before The Economic Club of Pittsburgh. Mester said that she expected employers would continue to add jobs, that inflation would return to 2 percent over the next couple of years and that unemployment would fall to its “natural rate” by the end of 2015.

“It has been a slow and difficult journey, with some stops and starts along the way,” said Mester, who became head of the Cleveland Fed three months ago.

“And while the final destination has not yet been reached, the economy has made significant progress on the road back toward fulfilling the Federal Reserve's goals of price stability and maximum employment.”

The federal Labor Department on Friday releases the monthly jobs report for August, a key measure of the economy and one of the benchmarks used by the Fed in considering when to wind down its unprecedented stimulus efforts and raise interest rates.

The Fed's asset purchase program, aimed at keeping interest rates low, has caused its balance sheet to grow significantly, from about $900 billion before the recession to about $4.5 trillion.

As a voting member on the Federal Open Market Committee, Mester helps to decide the direction of the Fed's monetary policy. Fed officials are scheduled to meet on Sept. 16 and 17.

She said the Fed would likely end its monthly bond buying program this fall and keep its benchmark federal funds rate near zero for a “considerable period.” That much was in line with what Fed officials have said previously, but Mester said the central bank should change its message on how long it expects to keep its benchmark federal funds rate at historical lows.

The Fed uses a variety of economic measures to decide monetary policy.

It has highlighted specific benchmarks, such as a 6.5 percent target on unemployment, to give clarity on what would trigger changes in its economic stimulus programs.

In 2011, Fed officials estimated they would keep rates near zero until at least mid-2013, but it has moved away from this timeframe and other more rigid targets.

Unemployment has since fallen below the Fed's original target, standing at 6.2 percent in July, but Fed Chair Janet Yellen has said she is taking a more comprehensive approach to reading the economy, weighing other factors such as long-term unemployment and wage growth in determining when to raise interest rates, which have been near zero since 2008.

Inflation is beginning to approach the Fed's target of 2 percent, and the unemployment rate has improved more quickly than many expected.

As the economy “journeys back to more normal territory, monetary policy will also need to navigate back to more normal seas,” Mester said.

As the Fed does so, it is time for the central bank to change its low-interest rate message to the public, Mester said.

“It seems to me that the current forward guidance is a bit stale,” she said, speaking to reporters after her speech.

Fed officials should be talking about the progress made on the central bank's economic goals, as well as the speed with which that progress is being made, Mester said.

“A faster pace of progress toward our goals would argue for a faster return to normal,” she said, “while a more subdued pace would argue for a slower return.”

Mester's career at the Fed stretches back three decades.

She began as an economist at the Federal Reserve in Philadelphia in 1985 and was hired as the Cleveland Fed president in June.

Western Pennsylvania is part of the district based in Cleveland, which includes West Virginia's Northern Panhandle, Ohio and eastern Kentucky.

Chris Fleisher is a staff writer for Trib Total Media. He can be reached at 412-320-7854 or

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