May 30, 2014 / 5:13 PM / 5 years ago

Fed's Mester stresses stable prices, inflation research

CLEVELAND (Reuters) - The Federal Reserve cannot achieve full U.S. employment over the longer term without stabilizing prices, incoming Fed policymaker Loretta Mester said on Friday, stressing that clear communication will be key as the central bank returns to a more normal policy stance.

Mester, who succeeds Sandra Pianalto as president of the Cleveland Fed on Sunday, gave a speech that was careful not to reveal her stance on monetary policy or the economic outlook. Instead she challenged Fed researchers to help the central bank better understand inflation.

“We cannot have full employment over the longer run without price stability over the longer run,” she said at a conference hosted by the Cleveland Fed, her first real introduction to Americans and Wall Street.

“The more we understand inflation dynamics, the more we will understand how inflation will respond to changes in monetary policy,” added Mester, who will immediately have a vote on the Fed’s policy committee. Such findings are relevant as the Fed “returns to a more normal policy setting framework over time.”

Mester is currently head of research at the Philadelphia Fed whose president, Charles Plosser, is an outspoken critic of the Fed’s accommodative policies. Mester, however, has not staked out such a hawkish stance.

The central bank has said that, depending on inflation and the labor market, it expects to start raising interest rates a considerable time after it ends a stimulative bond-buying program, which is set to end in the fall.

“I believe effective central bank communication is a crucial area of further research, especially in today’s environment when monetary policymakers are relying on forward guidance on interest rates as a primary policy tool,” Mester said.

While Mester focused on inflation, listing six questions that loom over the Fed’s understanding of prices, she said she backed the central bank’s dual mandate of price stability and full employment as complementary goals. The Fed targets inflation of 2 percent. It is less specific about what level of unemployment is appropriate, though policymakers see between 5.2 percent and 5.6 percent in the long run, according to estimates.

As it stands, inflation is running just above 1 percent and U.S. unemployment is 6.3 percent. “While the FOMC can choose the value of inflation it seeks to achieve over the longer run, it does not have the ability to achieve just any long-run objective for employment,” said Mester, referring to the Fed’s policy-setting Federal Open Market Committee. “Long-run employment is determined by economic fundamentals.”

Reporting by Jonathan Spicer; Editing by Chizu Nomiyama

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