Fed unshaken by U.S. election, focused on rate hikes - Mester

By Jonathan Spicer

CLEVELAND (Reuters) - The Federal Reserve must not overreact to market moves following the shock U.S. presidential election in part because it is too early to predict any new spending and trade policies, so the plan remains for gradual interest rate hikes, Cleveland Fed President Loretta Mester said in an interview.

"The markets react and then they react again," she told Reuters on Wednesday. "You have to be careful about overreacting to them ... because they don't know more than anyone else about what the (fiscal) package will look like."

Mester, a voter this year on Fed policy who is seen as hawkish but pragmatic, said she is not jumping to adjust her economic predictions. Rate hikes, she said, will react "as things get clearer on ... fiscal policy but also based on developments in Europe and the rest of the world."

The dollar index was near a 14-year high on Wednesday, a week after Americans defied predictions and polls and elected Republican Donald Trump as president.

Stocks, Treasury bond yields and inflation expectations have shot up as traders piled on bets Trump and a Republican-controlled Congress would embark on tax cuts and federal spending that would boost the economy and run up deficits. Trump's promises of heavy restrictions on immigration and trade, however, could hurt business activity and economic growth.

"The prospects for some kind of fiscal policy change have likely risen, but we don't know the timing of those policies or the form of those policies whether it's immigration or tax reform or infrastructure spending or trade policy," said Mester, seated in a regal board room at the Cleveland Fed.

Trump campaigned on renegotiating or halting some international trade agreements. Noting that there are "winners and losers" in free trade, Mester, whose district helped propel Trump to the White House, said "trade can raise economic living standards of countries, and free trade is a plus."

On immigration, she noted that employers often struggled to find skilled workers. "Policies that would make it harder to find qualified workers would increase pressure on those businesses, and it could end up being not necessarily good for the economy going forward."

A former Philadelphia Fed research director and expert on banks and inflation, Mester took the reins in Cleveland in mid-2014 and strongly supported last December's initial rate hike. She has been among the most anxious as the Fed stood pat this year and, since September, has dissented in favour of a policy tightening and warned about falling behind the curve.

Mester and most other Fed officials expect to raise rates again this December. They anticipate hiking two more times next year, pushing the target rate to about 1.1 percent by the end of 2017, according to the median forecast published in September.

"My path may be a little bit above the consensus path," Mester said of expected rate hikes. "The economy is getting back to both parts of our goals (so) it just seems appropriate to start moving rates up," she said, referring to the Fed's inflation and employment targets.

She would rethink that in the face of "extreme" market volatility, she said, "but the everyday movements that we're talking about ... is not something that I find particularly troubling, or would want to change policy stances because of it."

(Reporting by Jonathan Spicer; Additional reporting by Ann Saphir; Editing by Meredith Mazzilli)