By Michael S. Derby 

Federal Reserve Bank of Cleveland President Loretta Mester said Tuesday the U.S. central bank should press forward with interest-rate increases this year, while adding the recent wave of volatility in financial markets hasn't derailed a solid economic outlook.

"If economic conditions evolve as expected, we'll need to make some further increases in interest rates this year and next year, at a pace similar to last year's," Ms. Mester said in a speech in Dayton, Ohio. "This gradual approach is the best strategy for sustaining the expansion and balancing the risks to our dual-mandate goals."

Ms. Mester is a voting member of the interest-rate setting Federal Open Market Committee this year. The Fed raised rates three times last year, moving its overnight target rate to a range of between 1.25% and 1.50%. It has penciled in around three increases for the current year. In recent comments Ms. Mester has expressed that she shares that outlook but may favor a slightly more aggressive course of rate increases.

Ms. Mester didn't comment on the timing of the next rate rises in her prepared remarks. Many in financial markets are eyeing the Fed's March meeting as the next time to act. She told reporters after her speech that the timing of the next rate rise "is less important to me. It's really about the path and outlook."

A "gradual upward path of interest rates will help balance the risks and prolong the expansion so that our longer-run goals of price stability and maximum employment are met and maintained," Ms. Mester said. Slow and steady rate increase will allow the Fed to respond to unexpected developments, allow inflation to rise while mitigating the chance asset markets will destabilize, and give the Fed more room to respond to future economic troubles when they arise.

The market's recent woes haven't affected Ms. Mester's outlook. "Trading has been relatively orderly, markets have remained generally liquid, and there hasn't been a pullback in credit," she said.

"While a deeper and more persistent drop in equity markets could dash confidence and lead to a pullback in risk-taking and spending, the movements we have seen are far away from this scenario," Ms. Mester said. "I expect the economy will work through this episode of market turbulence and I have not changed my outlook."

Ms. Mester also said after her speech the rise in long-term bond yields seen recently wasn't concerning. "Long bonds are going up because the economy is in a good place...I think that's not a negative," he said.

Ms. Mester said in her speech that the economy is "sound" and 2018 looks "good" with growth of around 2.5%. The official reckons the recently passed tax bill will add about a quarter to a half percentage point to growth over the next couple of years, with the risk growth could be even stronger.

Both the monetary policy and financial conditions are "accommodative," and "the changes in tax policy will also have a positive effect on growth this year and next."

On the hiring front, Ms. Mester said "labor markets have been strong, and I expect that strength to continue," with what's now a 4.1% jobless rate falling below 4% this year.

Ms. Mester also expressed optimism that inflation will continue to mount, saying, "I expect it to gradually move up to our goal of 2% over the next one to two years."

Rob Modic in Dayton, Ohio contributed to this report.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

February 13, 2018 10:40 ET (15:40 GMT)