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Gradual rate hikes in the US are the best option, says Fed's Mester

  • I think a gradual path is the best strategy we have for prolonging the expansion," she said
  • n October, the Federal Reserve said the U.S. economy had been expanding at a steady pace and suggested that another rate hike could take place in December

A gradual increase in interest rates is the best way to deal with inflation and support the U.S. economy, Loretta Mester, president and CEO of the Federal Reserve Bank of Cleveland, told CNBC Thursday.

"I think a gradual path is the best strategy we have for prolonging the expansion," she said.

"Obviously we want to be responsible to changes in the economic outlook and as data comes in we are always revising the outlook," Loretta, a non-voting member of the Fed, said, mentioning she looks at inflation and inflation expectation numbers.

In October, the Federal Reserve said the U.S. economy had been expanding at a steady pace and suggested that another rate hike could take place in December.

The central bank has also began rolling off its $4.5 trillion balance sheet under its quantitative easing program, in an attempt to normalize monetary policy.

Higher oil prices are not a concern, for now

Loretta Mester
Dan Mescon | CNBC
Loretta Mester

Oil prices have traded close to two-year highs this week due to some political instability in the Middle East. As a result, inflation could be pushed higher and thus requesting a more hawkish stance from the Fed.

However, Loretta told CNBC that this doesn't worry her "for the moment."

"It's certainly part of the data that we will be looking at and focusing on," she said. "The key thing will be, does it upset inflation expectations? Will they arise? Will they respond to those oil price increases?" Loretta wondered.

Trump's tax plan doesn't affect forecasts

Meanwhile, President Donald Trump has proposed changes to the U.S. tax system. Though the package is still far from being approved by every political institution, some Fed officials have warned that it could hurt the path of inflation.

Tax changes could boost economic growth in the short-term, but also spook inflation and raise debt levels.

Loretta said she included some fiscal stimulus in her forecasts but because there are no details on how deep the reform will actually go, the tax plan doesn't have an impact for now on monetary policy.

"It's really hard to tell what will be in that final tax package," she said.

She added she included "a little bit" of fiscal stimulus in her outlook, but it does not have "a huge impact at this point."

"It's very difficult to build something in when you didn't really have the particulars of what formulation that tax package will be," she said.