MNI: Fed's Mester - Market Can Handle Larger Hike, QT in May

Cleveland Fed President Loretta Mester said Wednesday she was confident markets can handle both a more aggressive interest rate increase in May and the start of balance sheet shrinkage.

"I don't have concern that would be destabilizing," she said at a reporters briefing. "I find it appealing to frontload some of the action that we're going to need to do, and I think that both of our tools would be used."

Mester, who votes on interest rates this year, told students at John Carroll University in Ohio on Tuesday that she wants to see the fed funds rate near 2.5% by December and above neutral next year, and that she's open to 50bp hikes at one or more meetings this year.

The FOMC could slow down rate increases in the latter part of the year, but "if inflation isn't starting to move down and doesn't look like it's on a trajectory and moving down, then you can speed up and be more aggressive in the second half of the year," she added.

YIELD CURVE

It's also important to get QT started to avoid suppressing longer-term rates, Mester said.

The recent flattening of the yield curve have been driven by a flight to quality amid Russia's invasion of Ukraine as well as the prospect of Fed hikes.

"We don't want to, by our actions, distort the shape of the yield curve," she said.