This Fed official believes US interest rates may be significantly higher by the end of 2016

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Loretta Mester, a voting member of the US Federal Reserve’s FOMC, believes that a stronger growth outlook may see US interest rates move sharply higher in 2016.

Speaking to Reuters, the Cleveland Federal Reserve President stated that she was not opposed to her colleagues view that the central bank needs to raise interest rates only four times in 2016, although acknowledged that there may be a need to raise rates by more than 1% over the year as US economic growth accelerates.

Mester expects economic growth will accelerate to between 2.5% and 2.75% in 2016, slightly above the 2.4% median forecast offered by her colleagues at the December 2015 FOMC meeting, when the bank increased interest rates for the first time since June 2006.

“I’m pretty comfortable with the median path … I think that’s not a bad description,” Mester told Reuters.

“I’m probably a little steeper than that in the near term, just because I have a higher growth forecast.”

The dot plot chart below, based on FOMC member forecasts, reveals that the median expectation is for the bank to increase the Fed Funds rate four times in 2016.


Not only are Mester’s comments significantly more hawkish than the majority of her FOMC compatriots, financial markets currently have only two, perhaps three rate hikes, priced in for the entirety of 2016.

Given the divergence in views, should Mester’s forecast prove to be on the money, it will help strengthen the US dollar and likely place pressure on commodities, stocks, short-dated US debt and emerging markets as a consequence.

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