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Fed's Mester says 'we'll have some strengthening in the second half of the year'

Cleveland Federal Reserve President Loretta Mester, a central bank policy panel voting member this year, said Friday she expects to some signs of strengthening in the U.S. economy in the second half of 2016.

"I think the economy is on a good track," she said in an interview on CNBC's "Squawk Box." "I think the employment numbers show that, I think the inflation's numbers are coming up slowly, they're below our target still but they're moving in the right direction."

Mester said she thinks 3 percent growth for the second half of the year is "not unreasonable," and she believes inflation will move gradually back to 2 percent.

Cleveland Federal Reserve President Loretta Mester
Getty Images
Cleveland Federal Reserve President Loretta Mester

"I see a gradual upward pace in interest rates as being appropriate," Mester said. "Now, that doesn't mean we're behind the curve now. But I do think that it makes sense to be starting to move interest rates up on that gradual path."

Mester said the September meeting of Fed policymakers is a "live" meeting, meaning it's possible a rate increase could be on tap. She noted, however, that it's the path, not the timing, that's the key issue for rate increases.

Another voting member of the Federal Open Market Committee, St. Louis Federal Reserve President James Bullard, told CNBC on Friday the September Fed meeting might be a good time to raise rates.

Mester said she doesn't see imminent risks from low interest rates, but she is taking into account concerns like "frothy" commercial real estate markets.

"We're in an environment where we're at very, very low interest rates," Mester said. "And there is a potential for instability because of that. We saw that in the past, and we kind of want to have a framework where we don't go back to that again, so I think you have to take that seriously."

Minutes of the Fed's July policy meeting showed an array of opinions on the pace of rate hikes, with some voting members anticipating an interest rate increase soon. But most agreed they needed more data .

"I go into the meetings with an open mind," Mester said. "I like to hear what my colleagues say, I like hearing diverse views about the economy. And of course, we all have our own forecasts and frameworks for doing policy."

The interview was conducted ahead of Fed Chair Janet Yellen's speech at the Kansas City Fed's Jackson Hole Economic Symposium in Wyoming. In those remarks, Yellen voiced optimism about the economy and an expectation that interest rate hikes are ahead.

— CNBC's Anita Balakrishnan and Jeff Cox contributed to this report.

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