Cleveland Federal Reserve Bank President Says More Interest Rate Hikes Likely Ahead

Cleveland’s Federal Reserve Bank President, Loretta Mester, stated on Tuesday that the US central bank would probably impose further interest rate hikes. She made this statement after the banking sector troubles showed signs of containment.

Mester believes that the monetary policy needs to move somewhat further into restrictive territory in order to keep inflation on a sustained downward path to 2 percent and keep inflation expectations anchored. The Fed funds rate needs to move above 5 percent in order for this to occur.

The decision on how much higher to set the federal funds rate will depend on how much inflation and inflation expectations are declining, which in turn depends on how much demand is slowing, supply challenges are being resolved, and price pressures are easing, according to Mester.

At the policy meeting in late March, the Fed raised rates by a quarter percentage point, to between 4.75 percent and 5 percent. The decision was overwhelmed by banking sector troubles that made policymakers feel that a tightening in financial conditions would likely weigh on economic activity.

However, Mester was very comfortable with the rate rise, given that authorities had taken steps to manage risks coming from banking sector troubles, she said in remarks following her speech.

Although Mester does not have a vote on the policy-setting Federal Open Market Committee this year, her forecast is similar to the modal forecasts of FOMC participants released two weeks ago. She also pushed back on market views that the Fed would need to cut rates much sooner than central bankers currently expect.

Mester expressed confidence that banking sector woes should ultimately prove contained. “The US banking system is sound and resilient. The stresses experienced in the banking system in March have eased, but the Fed continues to carefully monitor conditions and is prepared to take further steps as necessary to ensure financial stability,” Mester said.

In her remarks, Mester said she expects growth and hiring to slow and inflation pressures to ease this year. She also expects a meaningful improvement in inflation with price pressures easing from a year-over-year increase of 5 percent to 3.75 percent by the end of 2021 and then to 2 percent by 2025. Unemployment, currently at 3.6 percent, should rise to between 4.5 percent and 4.75 percent by the close of 2023, she said.

By Michael S. Derby