Fed's Mester unmoved, says U.S. to overcome 'soft patch'

By Jonathan Spicer

NEW YORK (Reuters) - The U.S. economy remains sound and will overcome recent market turbulence, allowing the Federal Reserve to continue tightening its monetary policy as planned, a top Fed official said on Thursday.

Cleveland Fed President Loretta Mester said that while the global selloff in stocks and oil markets through January poses risks, she is not about to cut her expectations of continued U.S. economic growth and labor market improvement.

The comments, which echoed those this week of Fed Vice Chairman Stanley Fischer, suggested there is a camp within the U.S. central bank that will need more hard economic evidence before abandoning a well-telegraphed plan to lift rates higher this year.

"Solid" jobs and income growth "suggest that underlying U.S. economic fundamentals remain sound," Mester said at a Market News International conference, adding inflation should rise to a 2-percent target even if it takes a bit longer than planned.

"Until we see further evidence to the contrary, my expectation is that the U.S. economy will work through the latest episode of market turbulence and soft patch to regain its footing for moderate growth, even as the energy and manufacturing sectors remain challenged," said Mester, a hawkish official who has a vote on Fed policy this year under a rotation.

The Fed in mid-December raised rates from near zero and suggested that around four more hikes were coming in 2016. Shortly after, markets and commodities began falling, raising fears of a global slowdown and sowing deep doubts among traders that the Fed would continue with that many rate hikes this year.

Futures markets now see virtually no more rate hikes this year.

A month ago, Mester told Reuters she expected four or more rate rises this year. On Thursday, she did not make a prediction but said she continued to anticipate "moderate growth" and "gradual" policy tightening.

There is "some risk to the outlook, but I believe it is premature to materially change my modal outlook," she said.

"While there is a possibility that a steeper, more persistent drop in equity markets could lead to a broader and more persistent pullback in risk-taking, which would negatively affect the outlook, so far we have not seen this."

(Reporting by Jonathan Spicer; Editing by Diane Craft)

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