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The Fed: Fed’s Mester says ‘faster pace of rate increases’ on the table for September

The Federal Reserve must show “fortitude” in its battle to get inflation back under control and that could mean a faster pace of rate hikes in September, Cleveland Fed President Loretta Mester said Thursday.

In a speech to the Philadelphia Council for Business Economics, Mester backed the Fed’s consensus plan to raise its policy rate by a half-percentage point at its meeting on June 14-15 and then follow up with another half-percentage point move at its next meeting in late July.

At that point, Mester said, the Fed can consider the appropriate pace of further rate hikes.

So, if by the September FOMC meeting, the monthly readings on inflation provide compelling evidence that inflation is moving down, then the pace of rate increases could slow, but if inflation has failed to moderate, then a faster pace of rate increases could be necessary,” Mester said.

The Cleveland Fed President is a voting member of the central bank’s interest-rate committee this year. She did not address the idea of a “pause” in September that was raised by Atlanta Fed president Raphael Bostic.

Following the planned rate hikes in June and July, the Fed’s benchmark rate will be in a range of 1.75%-2%. Mester said that she thought this rate will have to eventually get above 2.5% to bring inflation down.

In her prepared remarks, Mester said that it was too soon to say that inflation had peaked.

“On the positive side, the monthly increases in the core PCE price index were relatively stable over February, March, and April.  But in April, the monthly readings of both core CPI inflation and the Cleveland Fed’s median PCE inflation reversed the declines seen in March,” she said.

A recession could be avoided, Mester said.

While the risks have increased, a “good case could still be made” that a recession was avoidable, with the economy slowing to about a 2% rate with inflation cooling to a range of 4.5%-5.5% by the end of the year.

The Fed’s favorite inflation gauge, the personal consumption expenditure index, was running at a 6.3% rate in April.

However, “there will be bumps along the road,” Mester warned.

“Financial markets could remain very volatile as financial conditions tighten further; growth could slow somewhat more than expected for a couple of quarters; and the unemployment rate could temporarily move above estimates of its longer-run level.  This will be painful but so is high inflation,” she added.

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