Federal Reserve Bank member and Cleveland Fed President Loretta Mester said she expects rates to rise significantly before the Fed eases its fight against inflation.
Specifically, Ms Mester said she sees interest rates rising above 4% in the coming months.
As a reminder, the range of the federal funds rate, which determines what banks charge each other for overnight lending and is linked to many consumer debt securities, currently stands at 2.25% – 2.5%.
“My current position is that it will become necessary to raise the rate somewhere above 4% by early next year and stay there,” Mester said in prepared remarks for a speech in Dayton.
As she notes, “I don’t expect the Fed to lower its interest rate target next year.”
In this context, L. Mester estimates that interest rates will remain high “for some time”, a phrase used in recent days by both Fed chief Jay Powell and New York Fed president John Williams.
According to Loretta Mester, real interest rates, meaning the difference between the Fed rate and inflation, should “move into positive territory.”
The Fed has raised interest rates four times this year by a total of 2.25%, with markets pricing in a third straight hike of 0.75% for the September meeting while expecting rate cuts to begin in the fall of 2023 .
Mester also said she expects interest rate hikes to slow economic growth, which she sees running “well below 2%,” while the unemployment rate will rise and financial markets will remain volatile.
He also believes that inflation will ease into the 5%-6% range this year and move closer to the Fed’s target in the coming years.
However, she does not see the need for the Fed to continue raising interest rates until inflation reaches its 2% target, pointing out that policymakers should remain vigilant.
“It would be a mistake to declare victory over the inflation beast too soon. That would put us back in the world of 1970s monetary policy, which came at a great cost to households and businesses,” he added.
Source: Capital
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