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Liftoff?

February 4, 2015 By Young Research

Could it be that the U.S. has finally reached a state of economic acceleration fast enough to motivate the Fed to raise rates? Cleveland Fed president Loretta Mester thinks the economy is strong enough to support “liftoff” on rates. Mester indicates her desire to see a raising of rates in the first half of 2015, though she doesn’t go so far as to aggressively pressure the FOMC.

Mester said in her speech (bold emphasis ours):

In response to the financial crisis and deep recession, the Federal Reserve has run an extraordinarily accommodative monetary policy to promote its goals of price stability and maximum employment. The FOMC has kept its policy rate – the federal funds rate – at essentially zero since the end of 2008.  This has lent important support to the economy, leading to the substantial progress we’ve seen in labor markets and the pickup in the pace of growth that underlie the projection that inflation will gradually return to our goal.

The economy is moving back to more normal territory, and as it does, monetary policy should begin to do so too.  Because monetary policy affects the economy with a lag, policymakers need to be forward looking.  We need to base our policy on both realized and expected progress toward our goals.  Based on my forecast and the risks I see around that forecast, I believe it will soon be appropriate to begin moving rates up from zero.  Because policy must be forward looking, in my view liftoff should occur before our goals are fully met.  But even after liftoff, policy will remain very accommodative for some time, promoting attainment of both goals.  Indeed, if incoming economic information supports my forecast, I would be comfortable with liftoff in the first half of this year, but as the FOMC has emphasized, policy isn’t on a pre-set path.  Both liftoff and the path of policy thereafter will be based on incoming information to the extent that it affects the economic outlook and progress toward our goals of maximum employment and price stability.

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