Fed's Mester says new framework makes clear strong employment not always a concern

FILE PHOTO: Cleveland Federal Reserve Bank President Loretta Mester speaks in London, Britain, July 2, 2019. REUTERS/Marc Jones

(Reuters) - The U.S. Federal Reserve’s new framework for setting monetary policy makes it clear that a strong labor market on its own is not cause for concern unless there are signs of inflation or financial stability risks, Cleveland Fed Bank President Loretta Mester said Wednesday.

The U.S. central bank last week announced a sweeping overhaul of its monetary policy strategy, adapting it for an environment where interest rates are expected to stay low. The shift puts more focus on shortfalls in employment and allows for slightly higher inflation.

“The new statement language clarifies that in the absence of inflationary pressures or risks to financial stability, strong employment is not a concern and monetary policy will not react to it,” Mester said in remarks prepared for a webinar.

The strategy makes it clear that since inflation has been running below the central bank’s 2% target, Fed officials will now “likely set policy with the intention to move inflation moderately above 2 percent for some time,” Mester said.

Monetary policy will need to remain accommodative for some time, but policymakers will take care not to let inflation get out of hand.

“It’s important to know that we’re going to not let inflation run rampant,” Mester said during a question and answer session of the webinar.

More fiscal support is also needed to support the economy, and the federal government should not let concerns about the U.S. deficit deter them from providing needed aid to households and businesses, Mester told reporters after the webinar.

She also stressed the need for the Fed to have flexibility when determining how much inflation it can tolerate under the new framework.

“It would be hard to choose a monetary policy rule and say we’re going to stick to that rule,” Mester said. “The economy is very different than the simple model in which these rules operate.”

Reporting by Jonnelle Marte; editing by Jonathan Oatis and Chizu Nomiyama