Federal Reserve Bank of Cleveland President Loretta Mester said there’s a “compelling” case for gradually raising interest rates, with the U.S. economy approaching the central bank’s targets on employment and inflation.

“Policy has to be forward-looking,” Mester told reporters Thursday following a speech in Lexington, Kentucky. “If you have a forecast and inflation is moving up to your target and you’re at full employment, then it seems like a gradual increase from a very low interest rate is pretty compelling to me. Pre-emptiveness is important.”

She declined to say precisely when she believed rate increases would be necessary.

The policy-making Federal Open Market Committee will meet Sept. 20-21 to decide whether to lift the target range for its benchmark rate. Fed Chair Janet Yellen said last week the case for an increase had “strengthened in recent months.”

Investors see a roughly one-in-four probability that the Fed will act later this month, based on pricing in federal futures funds contracts.

Too Low for Too Long

Mester, who votes this year on the FOMC, said the Fed must take seriously the risk to financial stability caused by keeping rates low for too long, although she said she didn’t think the central bank was currently “behind the curve.” Nor did she see signs of financial instability already in the economy.

In her speech, Mester rejected the argument made to a number of Fed officials last week by a coalition of community activists that continued low interest rates are needed to extend the benefits of economic recovery to disadvantaged minorities.

“I do not believe that at this point in the business cycle, the current very low level of interest rates is an effective solution to these longer-run issues,” she said.

Eleven Fed governors and regional presidents, including Vice Chairman Stanley Fischer, met with organizers from the Center for Popular Democracy’s “Fed Up” campaign on the sidelines of the annual policy retreat in Jackson Hole, Wyoming, hosted by the Kansas City Fed.

The U.S. central bank has kept rates on hold through five meetings this year following a rate hike in December that was the first in nearly a decade.

By Christopher Condon

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