Comments by Fed's Mester set prelude to heated debate at FOMC

Comments from several hawkish FOMC policymakers are suggesting that pre-referendum unity at the monetary policy committee is coming to an end.

President of Federal Reserve Bank of Cleveland, Loretta Mester speaking on Tuesday suggested that it is too early to judge the full magnitude of the UK referendum and agreed that it has added to the uncertainty. She also said that she doesn’t believe that the Fed has fallen behind the curve and still has some breathing space left.

While these comments are most in line with the dovish expectations from FED but what caught the attention are the following lines.

He said despite the uncertainty posed by the UK referendum, monetary policymakers cannot let the lack of economic clarity distract from our important mission. She also said that financial stability should not become Federal Reserve’s unofficial third mandate.

Another FOMC policymaker Esther George, President of Kansas City Fed has resumed her rate hike advocacy after the blockbuster jobs report released earlier in the month. She was voting for a hike since March but paused in June and she clarified that was due to weak job report for the month of May and looming referendum in the UK. She said, “The economy is at or near full employment………And yet short-term interest rates remain at historic lows. Keeping rates too low can also create risks.”

It is likely that Fed will be holding rates steady at July meeting but a hike in September can’t be ruled out at this point. Keeping a close watch on the commentaries and dissenters should help in assessing the path.