Fed's Mester says US economy can work through 'soft patch'

[WASHINGTON] Federal Reserve Bank of Cleveland President Loretta Mester said she sees no evidence yet that market volatility and oil's sharp price decline have spilled over to the broader US economy by denting risk-taking and the availability of credit.

"My current expectation is that the US economy will work through this episode of market turbulence and the soft patch of economic data to regain its footing for moderate growth," Mester said, according to the text of a speech Friday in Sarasota, Florida.

With her outlook for the economy unchanged, Mester said the Fed should remain on track for "gradual reductions over time" in the level of monetary accommodation from the central bank. She didn't say whether she would favor a rate increase at the March 15-16 meeting of the Federal Open Market Committee in Washington. Mester votes on policy this year.

Fed policy makers are struggling with how to react to the volatility that has seized financial markets since early January, just weeks after they raised their benchmark interest rate for the first time in almost a decade. Minutes of their January meeting, released Wednesday in Washington, show most officials were uncertain whether the turmoil would persist and affect their medium-term views on the US economy.

Mester said she "wouldn't be surprised" if the pace of job creation in the US slowed this year, but expected it to remain strong enough to continue lowering unemployment and support a "broader acceleration in wages." She also repeated her belief that inflation would eventually return to the Fed's 2 per cent target.

"Oil prices cannot continue to decline indefinitely, nor can the dollar continue to appreciate forever," she said. "At some point, both will regain some stability and the effect of previous changes on inflation will dissipate." Mester highlighted other positive data on spending and the health of household balance sheets and consumer lending.

"The fact that consumer lending is rising is an indication that, in general, consumers are feeling pretty positive about their earnings prospects," she said.

Mester's tone was more positive than that struck Wednesday by St. Louis Fed President James Bullard, who said it would be "unwise" for the Fed to push ahead with rate increases until market turmoil had subsided.

BLOOMBERG