Cleveland Fed's Mester says "too soon to say inflation goal has been met"

A top Federal Reserve official welcomed the recent rise in inflation to the central bank's target level, but said it was too soon to say its inflation had been met, apparently placing her in the camp of those rate-setters who were expecting just two more interest rates hikes in 2018 and not three.

Speaking at the French central bank on Monday, Cleveland Fed president, Loretta Mester, told her audience that: "These are welcome developments, but it is too soon to say that we have met our inflation goal on a sustained basis."

"Near-term monthly readings of inflation have risen, but some of the pickup reflects higher commodity prices and some of the strength is likely to be temporary, as low readings from last March drop out of the calculations," she added.

In her speech, Mester sounded a confident outlook for the economy, albeit less so for the long-term outlook for annual output growth.

She also referenced research from the regional Fed bank which argued against trying to run the economy a bit hot for a time in order to pull more people back into the labour market.

Indeed, that usually led to a less than optional assignment of labour resources and when the inevitable downturn followed it typically entailed a sharper pick-up in joblessness.

She also emphasised the importance of trends in labour productivity growth when trying to understand lower wage growth than in the past.

Nonetheless, it continued to be "appropriate" to remove "some" of the lax policy that was in place, in order to avoid the build-up of risks to macroeconomic stability or of potential financial imbalances.

"We want to give inflation time to move back to goal, and I don’t expect inflation to pick up sharply; this argues against a steep path, Mester went on to say.

The policymaker also said there was a very large margin of error attached to forecasts for the rate of inflation on the Fed's preferred price gauge, the price index for personal consumption expenditures.

One to two years ahead that margin of error stood at roughly 1.0%, she explained.

Among other points broached in her speech, Mester pegged the longer-run level required for the federal funds rate at 3.0% or 1.0% when adjusted for inflation.

She also indicated she felt "comfortable" 'looking through' "transitory" movements in inflation.

Significantly, she added that as things return to normal, it would be a good for the monetary authority to review whether the framework of flexible inflation-targeting it had historically used was still the best one.

In particular, she pointed out that if long-term equilibrium interest rates remained low, then under that framework the potential existed for longer recessions and bouts of low prices, due to the lower effectiveness of non-traditional monetary policy tools which it might require.

Among some of the alternatives broached by researchers were targeting a higher level of inflation or a nominal level of GDP.