Gradual interest rate hikes probably still ahead, Fed´s Mester says

A top US rate-setter reiterated her upbeat stance on the economy at the end of the week, pointing to fresh data on consumption and prices published earlier that same day as vindicating her view.

The president of the Federal Reserve bank of Cleveland, Loretta Mester, on Friday told journalists that the path for official interest rates was still one of gradual reduction, Reuters reported.

She admitted that market volatility, China´s growth slowdown and low crude oil prices might hurt the US economy, but judged it was "premature" to make any material changes to her outlook for the economy.

In remarks following her speech at a Global Interdependence Center event in Sarasota, Florida, Mester also said she believed a recent drop in measures of inflation expectations "more likely reflect changes in liquidity premia and inflation risk premia rather than changes in inflation expectations."

Data released by the Commerce Department earlier on Friday revealed that personal consumption expenditures roughly doubled economists´ forecasts for January, rising by 0.5% month-on-month.

Figures contained in the same report also showed that the 'core' PCE price deflator advanced at a 1.7% year-on-year pace last month - its largest gain since the end of 2012 - coming in ahead of market forecasts for a rise of 1.5%.

Headline PCE inflation printed at 1.3% year-on-year (consensus: 1.0%).

"Even more crucially for the Fed, we are now seeing blindingly obvious signs of a pick-up in core inflation, which is coming despite the deflationary impact from the stronger dollar.

"The Fed won’t raise rates in March, but we do expect it to resume hiking in June, with the fed funds target range climbing to between 1.00% and 1.25% by end-2016," Paul Ashworth, chief US economist at Capital Economics said after the report was published.

"Markets have ignored the steady increase in core CPI inflation over the past year, but they can't ignore this," chimed Ian Shepherdson, chief economist at Pantheon Macroeconomics.