MNI: Fed's Mester: Cutting Too Early Risks Undoing Progress

Cutting interest rates too soon and allowing high inflation to stick around is a risk not worth taking, Federal Reserve Bank of Cleveland President Loretta Mester said Tuesday, adding she sees higher inflation this year than the median FOMC projection.

"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 said in remarks prepared for a National Association for Business Economics event in Cleveland. (See: MNI POLICY: Fed's Rate Cut Timeline Shaken By Inflation Bumps)

Keeping rates high for too long while inflation expectations continued to decline would effectively tighten policy and risk hurting the labor market, she said. But moving rates down "too soon or too quickly without sufficient evidence to give us confidence that inflation is on a sustainable and timely path back to 2% would risk undoing the progress we have made on inflation."

HIGHER INFLATION

Mester's economic outlook is "similar" to median FOMC projections published last month, showing 75 bps of cuts by year end. But she sees "somewhat higher inflation" this year than the median forecasts of 2.4% and 2.6% for headline and core inflation, respectively.

She also raised her estimate of the longer-run federal funds rate to 3% from 2.5% last month "to reflect the continued resilience in the economy despite high nominal interest rates and higher model-based estimates of the equilibrium interest rate," she said.

"I expect further progress on inflation but at a slower pace than we saw last year," she said. "If the economy evolves as expected, then in my view it will be appropriate for the FOMC to begin reducing the fed funds rate later this year, as inflation continues on its downward path toward 2%, and labor markets and economic growth remain solid."