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Fed's Mester says central bank needs to be 'pre-emptive' of rising inflation

  • Cleveland Fed President Loretta Mester tells CNBC the Fed probably can't wait for inflation to rise above 2 percent.
  • Mester says the Fed has learned it needs to be "pre-emptive" of data that can often be difficult to forecast.
  • She says she's not "overly concerned" about the high levels in stock prices but persistently low interest rates pose a risk.
Loretta Mester at Jackson Hole, August 25, 2017.
Jodi Gralnick | CNBC
Loretta Mester at Jackson Hole, August 25, 2017.

Cleveland Fed President Loretta Mester said Friday the Federal Reserve should stay on its path of monetary policy tightening, despite some recent weakness in economic data.

"I want to reduce accommodation," Mester said in an CNBC interview from the central bank's symposium at Jackson Hole, Wyoming.

Without referring to a particular Fed meeting, she said: "I don't think we can wait until inflation gets back up to 2 percent."

"We've learned over time we need to be pre-emptive, and that means we have to be forward looking," said Mester, an alternate member of the Federal Reserve Open Market Committee.

Mester made similar comments last week to Reuters about inflation and rate hikes.

The Fed's July meeting minutes showed policymakers were divided over whether to be cautious over recent weakness in inflation or to move back to a more normal state of monetary policy.

Mester said Friday she was "not overly concerned" with where stock prices "are right now" due to "pretty good" corporate earnings and low interest rates, but keeping rates low is "a risk."

"We had to put in a lot of accommodation to address the financial crisis and Great Recession," she said. "Now that the economy is getting back to normal, getting monetary policy back to normal I think is the appropriate thing to do."

Stocks have surged to record highs as part of a bull market that began in 2009, when the Fed began an unprecedented amount of easy monetary policy in the wake of the financial crisis.

Mester added that uncertainty about federal stimulus has put businesses into a "wait-and-see" mode but her slightly above-trend growth forecasts are based on "momentum in the underlying economy" without incorporating much change in fiscal policy.

Despite political chaos in the Trump administration in the last few weeks, chief economic advisor Gary Cohn said in an interview with the Financial Times published Friday that the president will begin a major push for highly anticipated tax reform next week.

The Fed raised short-term interest rates twice this year, and in June, the median of committee members expected another hike by the end of the year. Markets assign a roughly 40 percent chance of a quarter point rate hike by the end of December, according to CME's FedWatch tool.

The Fed is also expected to announce in September when it will begin reducing its $4.5 trillion balance sheet.

Fed Chair Janet Yellen is scheduled to speak later Friday morning at Jackson Hole, followed by European Central Bank President Mario Draghi in the afternoon.

U.S. stocks traded slightly higher. Treasury yields held steady after data showed nondefense capital goods orders excluding aircraft rose 0.4 percent in July.