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Fed's Mester open to another rate hike if economy stays on current path

FILE PHOTO: Cleveland Federal Reserve President Loretta Mester speaks in London

By Michael S. Derby

NEW YORK (Reuters) - Cleveland Federal Reserve President Loretta Mester said on Tuesday she is open to raising interest rates again, potentially at the U.S. central bank's next meeting, if the current state of the economy holds, even as she acknowledged that a surge in long-term bond yields could change the monetary policy outlook.

"If the economy looks the way it did at the next meeting, similar to the way it looked at our recent meeting, I would do the further rate increase," she told reporters in a conference call.

But Mester, who does not hold a vote on the central bank's rate-setting Federal Open Market Committee this year, cautioned that what comes next for the Fed is still a moving target.

"I can't really tell you right now what will happen in the November meeting, December meeting," the official said of the policy outlook heading into the close of the year. "I probably favor going again, but again, we're going to have to wait and see how the economy evolves."

The FOMC is scheduled to meet on Oct. 31-Nov. 1 and again on Dec. 12-13.

Mester spoke to reporters after giving a speech late on Monday that laid out her expectation that one more rate hike in the Fed's benchmark overnight interest rate, which is currently in the 5.25%-5.50% target range, is justified given that inflation pressures, while easing, are still too high.

The Fed kept rates unchanged at its meeting last month. Although policymaker projections issued at that meeting penciled in one more increase for the year, many traders believe that with inflation moving steadily back to the central bank's 2% target, it will be able to hold off on further tightening.

Mester on Tuesday said that from her perspective, "the question is, how long do we need to keep monetary policy restrictive in order to be confident inflation is going to come down to 2%?" She added that "we're going to have to keep policy restrictive for some time," even as she refrained to say how long that would be, or when the Fed could contemplate lowering rates.

Mester said she expects inflation to return to 2% by the close of 2025. The latest Fed forecasts expect that to happen in 2026.

She also said surging bond yields - the yield on the 10-year Treasury note has risen to a level last seen 16 years ago - will affect the decisions Fed officials will make.

"We're going to have to follow that and watch it and that will influence not only our policy decisions, but how the economy evolves," Mester said. "Over the next year, those tighter or higher rates will have an impact on the economy and we just have to take that into account when we're setting monetary policy."

(Reporting by Michael S. Derby; Editing by Jonathan Oatis and Paul Simao)