Fed’s Mester says it’s appropriate to raise interest rates

Loretta Mester, president of the Cleveland Federal Reserve.

Cleveland Federal Reserve President Loretta Mester said on Wednesday that it is appropriate to raise interest rates and that doing so can prolong economic expansion.

In prepared remarks, she said that waiting too long to raise the U.S. central bank’s benchmark federal funds rate poses risks. The Cleveland Fed president said that the economy has made progress toward monetary policy goals.

“The underlying strength in the economy is demonstrated by the resiliency it has shown through a number of bumps along the road of expansion,” she said in prepared remarks at the Federal Reserve Bank of Cleveland. Mester also said she expects the U.S. economy to grow about 2 percent over the next couple of years.

While the Federal Open Market Committee said the case for an increase in the federal funds rate has strengthened at its September meeting, it left interest rates unchanged as the committee decided to wait for “further evidence of continued progress towards its objectives.” The Cleveland Fed president was one of three dissenters who advocated raising rates at the FOMC meeting.

“In addition, if we delay too long and then find ourselves in a situation where the labor market becomes unsustainably tight, price pressures become excessive, and we have to move rates up steeply, we could risk a recession, a bad outcome that history tells us disproportionately harms the more vulnerable parts of our society,” she said on Wednesday.

Mester added that the fundamentals supporting expansion remain sound and that fears over foreign weakness and the U.K. referendum vote to leave the European Union have subsided.

Household balance sheets have greatly improved, but business fixed investment remains weak, she said. Mester also said weak productivity and low capital expenditure are risks to longer term growth.