Fed's Mester sees danger in waiting too long to hike rates

Loretta Mester, president of the Cleveland Federal Reserve.
David Orrell | CNBC

Cleveland Fed President Loretta Mester believes the central bank was right to delay raising rates before the Brexit vote, but shouldn't wait too long.

Part of the Federal Open Market Committee's hawkish contingent, Mester said she still feels moving ahead with rate hikes is appropriate, particularly in light of an improving economy.

In explaining the vote at the June FOMC meeting not to raise rates, Mester said, "The reason was timing."

"It was clear there was going to be volatility in financial markets surrounding the vote," Mester said in prepared remarks for a speech Friday at the European Economics and Financial Center in London. "If the vote favored exit, there was the potential for disruption in markets. Given that I do not think U.S. monetary policy is behind the curve yet, I saw little cost in waiting to take the next step."

Britons voted in favor of exiting the European Union a week ago, setting off a brief but sharp market reaction that has since partially reversed. Global bond yields have tumbled, with the U.S. 30-year bond yield hitting a record low Friday and other sovereign yields around the world falling into negative territory.

After the Brexit vote, fed funds futures markets showed almost no chance that the FOMC would be raising rates this year. In fact, there's a small chance of a rate cut being priced in.

In her speech, Mester did not set out a timetable of when the Fed should resume the path to normalcy. But she expressed confidence in U.S. economic growth and said there's danger in waiting too long to move.

"If we fail to gracefully navigate back toward a more normal policy stance at the appropriate time, then I believe there is a non-negligible chance that these tools will essentially be off the table because the public will have deemed them as ultimately ineffective," she said. "This is a risk to the outlook should we ever find ourselves in a situation of needing such tools in the future."

Mester said she believes the labor and housing markets are improving, though business investment remains soft.

"Some parts of the U.S. economy have fared better than others," she said. "But overall, economic growth has proven to be resilient and at a pace slightly above trend. The pace has been sufficient to generate significant progress in labor markets."

Earlier in the day, Fed Vice Chair Stanley Fischer told CNBC he was taking a "wait and see" approach to where yields should go in light of the recent turmoil.