February 13, 2019 / 3:45 PM / 8 months ago

Fed's Mester sees limited inflation risk from rising wages

Loretta Mester, president of the Federal Reserve Bank of Cleveland, speaks during an interview in Manhattan, New York, U.S., August 15, 2017. REUTERS/Shannon Stapleton

LEXINGTON, Ky. (Reuters) - Cleveland Federal Reserve President Loretta Mester sounded a moderate tone about the effect of rising wages on inflation on Wednesday, underscoring the Fed’s pivot to a wait-and-see approach on rate hikes.

Mester, who is seen as leaning a bit “hawkish” or on guard to inflation concerns relative to her Fed colleagues, said rising wages can be a positive sign that may not lead to unhealthy price increases.

“The good thing about this is that it hasn’t been an inflationary pressure,” Mester said of heftier paychecks, speaking at a University of Kentucky Gatton College of Business and Economics event in Lexington, Kentucky. “It’s in line with productivity growth and it’s in line with inflation.”

The view that rising wages may not presage inflation could support an argument for fewer rate hikes. On Tuesday, Mester also said the Fed would finalize plans to end the Fed’s policy of reducing its trillions in bond holdings “at coming meetings” to help the Fed better implement its current policy. She did not lay out a more specific timetable.

Still, she told reporters that she sees no evidence that shrinking holdings of U.S. banks’ excess reserves as a consequence of the balance sheet reduction are affecting those financial institutions’ ability to lend money.

Mester does not have a vote on the Fed’s monetary policy committee this year but participates in the central bank’s deliberations.

Strong, but tame, economic conditions filter into Mester’s views on rising corporate share buybacks, which some investors and elected U.S. officials have said are drawing dollars away from investment and compensation.

“The economy overall is quite healthy and so in that sense - 3 percent growth last year is a healthy economy - so you want businesses to be able to make decisions like that on their own,” Mester said in response to a Reuters reporter’s question on the sidelines of Wednesday’s event.

Mester also told reporters she would be hard pressed to support massive changes to how the Fed sets its target for inflation levels in the economy as part of a broader review the central bank is doing of its policies this year. Yet she said she sees the appeal in approaches that would change how the Fed meets its objectives if rates fall to ultra-low levels during the next recession.

Reporting by Trevor Hunnicutt; Editing by Chizu Nomiyama

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