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Fed's Mester: Policymakers aren't boxed in on rates

While the Federal Reserve has been telegraphing the possibility of an interest rate increase next month, Cleveland Fed President Loretta Mester said Thursday policymakers are not boxed in to move. But she said, "Things are on track."

Appearing on CNBC's "Squawk Box," Mester said the Fed is trying to be as transparent as it can about the option to hike rates if economic conditions warrant an increase. She believes the economy can absorb the first rate hike in nine years.

Mester characterized the labor market as near or at full employment. She also said recent price measures pointed to inflation moving to the Fed's 2 percent target.

"The monetary policy has to be moving before we meet the goals," she said, but stressed she does not believe the Fed is behind the curve. "I don't think we're that miscalibrated right now."

While expressing some concern about a chance for "financial imbalances" should the Fed wait too long on rates, Mester said the "gradual path" higher is more important than the exact timing of the first move.

In the yearly rotation of regional Fed presidents on the Federal Open Market Committee, Mester becomes a voting member on the policy panel next year. Fed policymakers meet Dec. 15-16. She's been on the job for a little more than a year.

The minutes from the central bank's October meeting, released Wednesday afternoon, reinforced the message to investors that as long as data cooperate interest rates could go up next month.

Read MoreFederal Reserve leaves itself a little room — just in case

Taking that as a signal of Fed confidence in the economy, the stock market Wednesday rallied strongly, erasing November's losses.

The S&P 500 index joined the Nasdaq composite in the green for the year, while the Dow Jones industrial average closed just 86 points shy of breakeven for 2015.

Fed policymakers held rates steady at last month's meeting, a move opposed by lone FOMC dissenter Richmond Fed President Jeffrey Lacker. On "Squawk Box" on Wednesday, he made his case that rates should have already been increased.

Lacker was also the only dissenter at the FOMC's September meeting, which saw the Fed keeping rates steady, in part because of global growth concerns sparked by a Chinese downturn.

Read MoreFed's Lacker: Why we should hike rates in December

As for possible financial fallout from the Paris terrorist attacks, Mester told CNBC: "Right now, my assessment is that it's not going to change the outlook that much ... in terms of growth for the U.S. economy."

"When you think about the economics of those kinds of attacks that we've had in the past, usually you see a sharp change in markets," she continued. But typically, she added such moves don't last. "That's what we saw in the markets here."