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UPDATE 1-Fed's Mester says policy will remain accommodative for some time

·1 min read

(Adds details of Mester's outlook)

By Jonnelle Marte

May 6 (Reuters) - The economic outlook is brightening but more improvements are needed to the labor market and inflation before the Federal Reserve will start to scale back monetary support, Cleveland Fed Bank President Loretta Mester said on Thursday.

The U.S. economy is still short more than 8 million jobs from before the pandemic and inflation is expected to trend down next year after a temporary increase, Mester said.

"My view is policy is going to have to remain very accommodative for some time because we want that recovery to broaden," Mester said during a virtual conversation organized by the University of California, Santa Barbara.

Health risks and issues in securing childcare are making it difficult for some people to get back to work, but some of those obstacles may be resolved over the next several months as more people are vaccinated, Mester said.

She forecasts the unemployment rate could drop to about 4.5% or less by the end of this year and inflation could grow by more than 2% this year before coming back down next year, Mester said.

Fed officials agreed last week to keep interest rates near zero and to continue purchasing $120 billion a month in bonds until there is "substantial further progress" toward the Fed's goals for inflation and maximum employment.

Mester said it is important to remember that even after the Fed begins to reduce its asset purchases, the process will be gradual. "Monetary policy will remain highly accommodative," she said. (Reporting by Jonnelle Marte in New York Editing by Chris Reese and Matthew Lewis)