Fed's Mester Says Devil Will be in Details on Fiscal Policy Changes

The U.S. economy needs higher interest rates although theFederal Reserve will closely scrutinize the expected changes in America's fiscal, trade and immigration policies, Cleveland Fed President Loretta Mester said on Wednesday.

Mester did not specifically refer to proposals by U.S. President-elect Donald Trump to slash tax rates, boost infrastructure investment and curtail immigration.

But she said changes in these policy areas appeared likely to change and the U.S. central bank would have to weigh how they affect employment and inflation.

"The devil will be in the details," Mester said in prepared remarks before a luncheon of the African American Chamber of Commerce of Western Pennsylvania.

Since Trump's victory in the Nov 8 presidential election, Fed officials have warned the central bank might have to raise rates more quickly if the government heats up the economy by ramping up deficit spending.

At the same time, it remains "very uncertain" how much fiscal and other policy changes will change, Mester said.

Mester dissented at the Fed's last two policy meetings when the central bank kept interest rates steady. She voted in favor of quarter percentage point increases in the Fed's targeted range for overnight lending between banks, which has been between 0.25 percent and 0.5 percent since December.

On Wednesday, she said she still backed a rate increase, which investors widely expect will come at the Fed's December 13-14 policy meeting.

"I view another increase in interest rates as a prudent step to take," Mester said.

She said the U.S. employment market appeared to be at full strength and that postponing rate increases would raise the risks the Fed would have to hike quickly, potentially triggering a recession.

"I view a small step up in interest rates as appropriate, not because I want to curtail the expansion, but because I believe it will help prolong the expansion," she said. (Reporting by Jason Lange; Editing by Chizu Nomiyama)