Fed's Mester makes case for U.S. rate hikes sooner than later

By Jonathan Spicer

NEW YORK (Reuters) - The Federal Reserve should begin a gradual series of interest rate hikes "relatively soon" as long as the economy rebounds from a soft first quarter, since the benefits of delaying are running thin, a top Fed official said on Thursday.

Cleveland Fed President Loretta Mester, a newer but influential policymaker at the central bank, painted an optimistic picture of the U.S. economy and delivered a three-pronged thesis for starting to tighten policy sooner rather than later.

In a speech to economists, Mester said lifting rates from near zero relatively soon would allow the Fed to follow a gradual path of subsequent hikes that would not derail the economic expansion driven by a stronger job market and more resilient households.

Waiting too long to tighten, she added, could destabilise financial markets.

"If it turns out that the incoming information shows that growth is regaining momentum after the first-quarter slowdown and more broadly supports my forecast, I would be comfortable with liftoff relatively soon," Mester said, adding the "soft" first quarter was likely transitory.

"The potential returns to delaying action will soon be outweighed by the potential returns to beginning the normalization process," she told The Forecasters Club of New York.

Financial markets globally are focused on when the Fed will hike rates after more than six years at rock bottom, given recent U.S. economic growth and strong job gains over the last several quarters, despite a slump in March. Most economists point to September or later as a likely time for "liftoff," though the Fed has left the door open to move in June.

Mester, who is toward the hawkish side of the spectrum of Fed policymakers, did not repeat her call for a hike in the first half of the year. But her cost-benefit argument sounded much like that of John Williams of the San Francisco Fed, who sees fewer risks for the Fed after liftoff

She repeated an expectation that the economy would average about 3 percent growth from the second quarter through the end of 2016, and said the labour market was nearing full employment.

Mester said inflation, which has been too low for the Fed's taste, should rise to a 2-percent goal by late 2016.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)