The Federal Reserve needs to raise interest rates further because inflation is now expected to be above the Fed’s target for four years, Cleveland Fed President Loretta Mester said Monday.
“In order to ensure that inflation is on a sustainable and timely path back to 2%, my view is that the funds rate will need to move up somewhat further from its current level and then hold there for a while as we accumulate more inflation on how the economy is evolving,” Mester said in a speech at the University of California San Diego.
The Cleveland Fed president said that “a slightly higher policy rate” would get the benchmark rate up to a level where the next move could either be a rate hike or a rate cut.
“This would be a good holding point as we accumulate more inflation about whether the economy is evolving as expected,” she added.
The big picture view is that the U.S. economy has shown more underlying strength than anticipated earlier this year and inflation has remained stubbornly high, “with progress on core inflation stalling,” Mester said.
In June, the Fed held its policy rate steady at a range of 5%-5.25%.
Most economists expect the Fed to raise its benchmark rate by 25 basis points to a range of 5.25%-5.5% after its meeting in two weeks.
Mester noted that the Fed’s own forecast, released last month, now shows that the median projection of Fed officials now expects inflation to remain slightly above 2% at the end of 2025. That means inflation will have been above the Fed’s 2% target for more than four years.
A more timely path back to 2% inflation is desirable because otherwise households and businesses may come to expect high inflation, and this makes it harder to bring inflation down, she said.
In comments to reporters after her speech, Mester said the fact that the economy is “holding up” in terms of activity and labor market “gives us the opportunity to do a little more work with the Fed’s funds rate to get inflation down.”
Mester wouldn’t comment on the Fed’s meeting in two weeks beyond saying she was waiting for more data to make a decision.
On the outlook for a potential credit crunch in the wake of the collapse of Silicon Valley Bank, Mester said that it was “a real concern” but banks have generally not “carried forward” some initial pullback.
“I am not seeing anything when I talk to banks..that there is this extra tightening due to stress in the banking industry,” she said.
But it is something to watch because banks still have a lot of unrealized losses on their balance sheets.
In a separate speech Monday, San Francisco Fed President Mary Daly said “a couple” more rate hikes are likely this year to fight inflation. She said she was surprised the economy had so much momentum.
Read: ‘We’re likely to need a couple more rate hikes over the course of the year,’ Daly says
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