Dan Mescon | CNBC
Cleveland Federal Reserve President Loretta Mester said on Monday she would be comfortable raising interest rates at this point if the economy maintained its current pace of performance.
In a speech in Singapore, Mester, seen as one of the more hawkish Fed officials, said the economy was on a "sound footing." She also cautioned against asking the central bank to solve problems beyond its control, such as low productivity growth.
"We did have a temporary oil price shock which held down inflation, we had the dollar appreciation which held down inflation. Those have passed through and the trend in inflation is, it's moving up," Mester said during a Q&A session with the audience after her speech at a central banking seminar in Singapore.
"So I'm comfortable that inflation is near its goal and moving toward its goal... I'd be comfortable with an increase in the (federal) funds rate at this point, if the economy keeps going the way it's going."
Mester has dissented against decisions to keep rates steady at past meetings, instead preferring a faster pace of rate hikes. On Monday, she urged the Fed to focus on returning to a more normal policy footing, including trimming its $4.5-trillion bond portfolio.
Fed Chair Janet Yellen said last week that the U.S. central bank will likely need to raise interest rates at an upcoming meeting, although she flagged considerable uncertainty over economic policy under the Donald Trump administration.
The Fed has raised rates twice in two years and expects to pick up the pace of tightening this year as unemployment, at 4.8 percent, has fallen to near an equilibrium level and as the Republican-controlled White House and Congress are expected to provide fiscal stimulus.
Mester added she was "very doubtful that monetary policy could be targeted to spur a strong pickup in the types of investment in human capital and physical capital that would raise productivity growth."
Years of disappointing productivity growth has stymied the Fed's expectations that the U.S. economy would grow sustainably quicker than its roughly 2 percent rate.
Turning to the balance sheet, which the Fed quadrupled in the wake of the financial crisis to spur investment and hiring, Mester reiterated the central bank expected to shed its mortgage-backed bonds and return to an all-Treasurys portfolio.
"The return to primarily Treasuries will take some time, but it will be welcome because ... it may help guard against future calls for the Federal Reserve to enter into the realm of fiscal policy," she said.