MNI BRIEF: Mester Says Fed Policy Must Be Restrictive

High and persistent inflation means it will “take some time” for the Federal Reserve to restore price stability, Cleveland Fed President Loretta Mester said Wednesday in remarks that echoed hawkish recent comments from Chair Jerome Powell and other FOMC members that have battered stocks and sent bond yields higher.

“The return to price stability will take some time and a lot of fortitude,” she told a business conference in Dayton, Ohio. “Financial markets could well remain volatile as financial conditions tighten further; growth could slow more than expected; and the unemployment rate could move above estimates of its longer-run level.”

"I anticipate that policy will need to move into a restrictive stance in order to put inflation on a sustained downward trajectory to 2%. In my view, that means that short-term interest rates adjusted for expected inflation, that is, real interest rates, will need to move into positive territory and remain there for some time. Right now, nominal short-term interest rates are lower than expected inflation, so short-term real interest rates are still negative and monetary policy is still accommodative."

St. Louis Fed President James Bullard recently told MNI’s FedSpeak podcast that rates might need to be “higher for longer,” while Philadelphia Fed President Patrick Harker said on the podcast that he would like to see rates above 3.4% by year end.