By Lindsay Dunsmuir
(Reuters) - The U.S. Federal Reserve should recognize that there is uncertainty in its economic forecasting but that should not stop it from taking monetary policy decisions, Cleveland Fed President Loretta Mester said on Thursday.
"There is not one model that forecasts with much accuracy," Mester said in her first speech since the U.S. central bank held rates at its last policy meeting in April. "This shouldn't paralyze us."
Mester's remarks, delivered at a monetary policy conference held on Reichenau Island, Germany, focused on inflation, an issue that has vexed the Fed.
Inflation has run below the U.S. central bank's two-percent target rate for years and is one of the main reasons, along with global economic uncertainty, that the Fed has yet to raise rates again.
But the Cleveland Fed chief, who has been less cautious about future rate increases than many of her colleagues, said that inflation measures have moved higher.
The Fed's preferred measure of core inflation was 1.7 percent in the first quarter compared to 1.3 percent a year ago, she noted, and household inflation expectations are sensitive to large changes in energy prices.
And while other Fed policymakers have fretted about low levels of market-based measures of inflation expectations, Mester cautioned about reading too much into them.
The Fed hiked rates from near zero for the first time in a decade last December and Mester has warned that waiting too long to raise again could cause the central bank to jack up rates more aggressively down the line.
"I think we need to be somewhat cautious when inferring a signal about changes in inflation expectations from these market measures," she said, adding that there is also a lack of liquidity in the Treasury inflation-protected securities market.
Fed policymakers in March forecast two further rate hikes this year, but their April policy statement signaled they are in no rush to raise the benchmark interest rate from its current 0.25-0.50 percent range any time soon.
Mester also said she was in favor of introducing error bands around the policymakers' quarterly projection on the U.S. outlook to help the public understand some of the risks around the forecasts, and also remind the committee that "we constantly live with uncertainty."
Traders of futures tied to the Federal Reserve's benchmark interest rate see the Fed raising rates again only in December.
Mester has a vote on the Fed's rate-setting committee this year under a rotation system. The Fed next meets on June 14-15.