Federal Reserve Bank of Cleveland President Loretta Mester (pic) said yesterday that while the economy appears on a path toward slowing down, the central bank likely has more rate rises ahead of it.
“In my modal projection, to put inflation on a sustained downward trajectory to 2 per cent and to keep inflation expectations anchored, monetary policy moves somewhat further into restrictive territory this year, with the fed funds rate moving above 5 per cent and the real fed funds rate staying in positive territory for some time,” Mester said in the text of a speech for delivery before a group of economists in New York.
“Precisely how much higher the federal funds rate will need to go from here and for how long policy will need to remain restrictive will depend on how much inflation and inflation expectations are moving down, and that will depend on how much demand is slowing, supply challenges are being resolved, and price pressures are easing,” she said.
Mester’s comments came in the wake of the Fed’s late March policy meeting that saw officials raise rates by a quarter percentage point, to between 4.75 per cent and 5 per cent. The Fed’s decision was haunted by banking sector troubles that led officials to say a tightening in financial conditions would likely weigh on economic activity. Some had called on the Fed to refrain from a rate rise while it took stock of how deep and persistent banking troubles might be for the economy.
At the Federal Open Market Committee meeting, officials also pencilled in a single additional rate rise for the year, as officials continue to boost the cost of short-term borrowing in a bid to lower inflation.
In her remarks, Mester, who does not have a vote on the FOMC this year, said “my forecast is similar to the modal forecasts of FOMC participants released two weeks ago, although I see somewhat more persistent inflation pressures than the median forecast among participants.”
Mester expressed confidence in her remarks that banking sector woes should ultimately prove contained.
“The U.S. banking system is sound and resilient,” she said, adding “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.”
In her remarks, Mester said she expects growth and hiring to slow and inflation pressures to ease.
There should be a “meaningful improvement” in inflation with price pressures easing from their current 5 per cent year-over-year increase to 3.75 per cent this year and to 2 per cent by 2025, Mester said.
Tighter financial conditions should help lower demand and job growth should slow down, the official said, with growth slowing to below trend levels this year before ticking up next year, Mester said. Against the current unemployment rate of 3.6 per cent, unemployment should rise to between 4.5 per cent and 4.75 per cent by the close of 2023, Mester said. ― Reuters
