'Time is near' for US interest-rate increase

The US Fed's rate-setting committee will go into its June meeting with an "open mind" about whether to raise the central bank's benchmark rate, says Loretta Mester. Photo / Getty

Accelerating inflation and strong employment growth are pushing the US economy close to the point where it can support higher interest rates, Federal Reserve Bank of Cleveland President Loretta Mester said on Monday.

"If the data comes in according to my forecasts then the time is near where we're going to be wanting to raise rates," Mester said in an interview in Reykjavik, Iceland.

The Fed's rate-setting committee will go into its June meeting with an "open mind" about whether to raise the central bank's benchmark rate, Mester said after delivering a speech at a conference on the financial system.

"We'll get another employment report to look at as well as some other data and we'll make a judgment at that meeting. In my mind every meeting is on the table," she said. Mester will be a voting member of the Federal Open Market Committee next year.

Fed Chairwoman Janet Yellen said last week she still expects to raise interest rates this year if the economy meets her forecasts, with a gradual pace of tightening to follow. The core US consumer-price index rose 0.3 per cent in April, the biggest gain since January 2013, a Labor Department report showed on Friday.

US employment rebounded last month after faltering in March, a sign the world's biggest economy may be regaining momentum after stagnating early this year.

Recent figures suggest the economy's setback in the first quarter was "transitory," Mester said, adding that she's "reasonably confident" that inflation is heading toward the Fed's 2 per cent target in the medium term.

In her speech, Mester said an extended period of "essentially zero" interest rates may pose risks to financial stability. "I do think that when we are making policy decisions, we should be cognizant of the linkages between our nonconventional monetary policy of an extended period of essentially zero interest rates and financial stability."

Mester said it's "very important" the Fed retain its independence in setting monetary policy. "The Congress in the US gives us our goals," she said. "We're held accountable to the American public.''

The Fed has been under increasing congressional pressure to say more about how it conducts monetary policy and bank supervision. The Senate Banking Committee last week approved legislation that would require the Fed to disclose more information to Congress about monetary policy decisions, and make the head of the Federal Reserve Bank of New York subject to confirmation by the Senate.

- Bloomberg