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Mester – Cutting Too Early Could Undo Inflation Progress

FED
  • Cleveland Fed’s Mester (’24 voter retiring in June) says her view on inflation hasn’t changed much since the start of the year. Full remarks here.
  • More data will show if disinflation has stalled or not. She doesn’t expect to have enough info by the May meeting to cut but sees cuts later this year if the economy evolves as expected.
  • The comments are in keeping with other recent Fed commentary and don’t alter market pricing, with markets already heavily discounting the chance of a May cut with just 2bps priced. Indeed, there is only a cumulative 16bp priced for June with 25bp for July.
  • "At this point, I think the bigger risk would be to begin reducing the funds rate too early. And with labor markets and economic growth both being very solid, we do not need to take that risk,"
  • She also revised her longer-run fed funds rate estimate 50bps higher to 3% “to reflect the continued resilience in the economy despite high nominal interest rates and higher model-based estimates of the equilibrium interest rate, r-star.”
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