Fed's Mester says recovery sustainable, rate hike needed 'soon'

Cleveland Federal Reserve President and CEO Loretta Mester gives her keynote address at the 2014 Financial Stability Conference in Washington December 5, 2014.   REUTERS/Gary Cameron 

WASHINGTON, (Reuters) - The U.S. economic recovery appears sustainable, with the labor market approaching full employment and above-trend growth likely to continue through next year, Cleveland Federal Reserve President Loretta Mester said on Monday.

Speaking to an association of business economists, she said the improving conditions mean the Fed should raise interest rates "soon."

"If incoming economic information continues to support my forecast, I would be comfortable with liftoff in the first half of this year," Mester said. "The economy is making substantial progress toward the Federal Reserve's goals" of full employment and two percent annual inflation.

Fed officials meet next week and are increasingly expected to remove from their statement language that they will take a "patient" approach to their first rate hike since 2006. That would allow for a rate increase as early as June.

Mester said she feels the current 5.5 percent unemployment rate is close to meeting the Fed's full employment mandate. While inflation remains weak, Mester said she is "reasonably confident" that prices will rise by the end of next year.

Mester does not currently vote on the Fed's policy-setting committee.

She does serve on a panel meant to review the Fed's communications strategy. She said she felt the central bank could do a better job explaining how its decisions relate to economic conditions - particularly as the post-crisis recovery continues and conditions return to normal.

However some of her recommended changes have been hard to negotiate. She said, for example, that she felt it would help if central bank policymakers agreed on a joint forecast - rather than the anonymous individual forecasts that are published every quarter and serve to show the wide divergence of views among policymakers about the economy's direction.

A joint forecast, of the sort used by other central banks, would better link the Fed's decisions to its economic outlook, she said.

But so far the change has not been possible because "it proved difficult to reach a consensus on a consensus forecast," she said.

(Reporting by Howard Schneider; Editing by Andrea Ricci)