Fed's Mester cites risks of policy that stays lower for too long

WASHINGTON (Reuters) - Cleveland Federal Reserve Bank president Loretta Mester said on Friday that there were risks to holding interest rates lower for too much longer, including potential financial stability concerns and an erosion of public confidence in the economy.

Mester, speaking at a conference in New York, said that economists were more apt to estimate the employment and lost output costs of raising interest rates too soon, "but they are less likely to quantify the costs of waiting too long...Our models aren't well enough developed to allow us to quantify the risks to financial stability of holding rates at zero for a long time, yet the crisis showed us that financial stability comes with a very high cost."

She also said there are risks that, over time, the public and investors will come to view a central bank's hesitancy to raise rates as a lack of faith in the strength of the economy, undermining confidence and hurting economic performance.

"The public might believe that central bankers are holding rates low for longer because they have a gloomy outlook," she said. "This would not necessarily yield better economic outcomes."

Mester's speech was a technical discussion of economic methods for estimating neutral interest rates. She did not explicitly say that the Fed or the U.S. faced the hypothetical risks she outlined.

But Mester has pushed for the Fed to leave the zero lower bound and begin tightening soon.

(Reporting by Howard Schneider; Editing by Chizu Nomiyama)