Fed's Mester: Rate hike now would help the economy

Raising interest rates now would help rather than hurt the economic recovery, Cleveland Fed President Loretta Mester said in a speech Wednesday.

Mester has pushed her central bank colleagues to follow up on the December 2015 rate hike that was the first in more than nine years. However, the Federal Open Market Committee has stayed on the sidelines, keeping its overnight funds target in the 0.25 percent to 0.5 percent range.

Committee hawks believe the Fed is missing an opportunity to get ahead of the curve and is in turn risking that once inflation heats up, it will have to act in a way that could endanger growth.

"I view a small step up in interest rates as appropriate, not because I want to curtail the expansion, but because I believe it will help prolong the expansion," Mester said in remarks prepared for a speech to the African American Chamber of Commerce of Western Pennsylvania Annual Business Luncheon in Pittsburgh.

"We know that monetary policy affects the economy with long and variable lags, so policy actions have to be taken before our policy goals are fully met," she added. "The lesson that policy should be forward looking is based on the history of poor outcomes when that strategy hasn't been followed and we've fallen far behind the curve."

When it approved the December rate hike, the FOMC indicated that four more increases were on the way in 2016. Instead, there haven't been any, though traders assign a nearly 100 percent chance of a move at the Dec. 13-14 meeting.

At the November meeting, Fed officials said they believe the time was getting close for another hike, but preferred to wait "for some further evidence of continued progress toward" the Fed's goals of 2 percent inflation and full employment.

Mester said further delays will be risky and could lead to a recession. She advocated for a gradual rise in rates that she said would come along with an economy that continues to improve.

"If we delay too long and then find ourselves in a situation where the labor market becomes unsustainably tight, price pressures become excessive, and we have to move rates up steeply, we could risk a recession, a bad outcome that disproportionately harms the more vulnerable parts of our society," she said.

She also warned that investors could intensify a quest for yield, "raising risks to financial stability." However, she said she doesn't think the Fed is behind the curve yet.