In order for the central bank to scale down its efforts to combat inflation, according to Cleveland Federal Reserve President Loretta Mester, interest rates must rise significantly.
Mester, who is this year’s voting member of the Federal Open Market Committee that sets interest rates, predicted that benchmark rates will rise over 4% in the upcoming months. That is far higher than the federal funds rate’s current target range of 2.25 to 2.5 percent, which determines the cost of overnight borrowing between banks but is also linked to many consumer loan products.
Only a 1-in-3 likelihood is now assumed by the markets for the funds rate to increase to 4% next year.
In prepared remarks for a speech in Dayton, she stated, “My present judgement is that it will be essential to bring the fed funds rate up to somewhere above 4 percent by early next year and hold it there.” “I don’t think the Fed will lower its fed funds rate target in 2019,”
In keeping with that, Mester predicted that rates would remain high “for some time,” a term recently uttered by both New York Fed President John Williams and Fed Chairman Jerome Powell. The difference between the fed funds rate and inflation, or real rates, she said, will need to “move into positive territory.”
Rates were increased by the Fed four times this year for a total increase of 2.25 percentage points. The third consecutive 0.75 percentage point hike is anticipated by the markets for the September meeting, and rate reduction are anticipated to begin in the fall of 2023.
Mester stated that she expects the rate hikes will hinder the economy’s growth, which she believes is now running “far below 2%” as the unemployment rate is rising and the financial markets are still unstable. Inflation, according to her prediction, will drop to a range of 5%-6% this year before moving toward the Fed’s objective in the following years.
She said she does not necessarily believe the Fed will have to keep raising rates until inflation reaches the central bank’s 2% goal, which is a concession to those seeking lower rates. She added that decision-makers must continue to be alert.
To prematurely declare victory against the inflation beast would be a mistake. This would return us to the 1970s’ stop-and-go monetary policy environment, which was extremely expensive for individuals and businesses, she warned.