MNI: Fed's Mester-Mistake To Declare Victory On CPI This Week

It would be a mistake to think that inflation is on a sustainable path toward 2% even if the CPI readings for June fall this week, Federal Reserve Bank of Cleveland President Loretta Mester said Monday, adding at least two more quarter-point interest rate increases are needed this year to cool the economy.

"Theexpectationisthatwecouldgetalow reading thisweek,butwe'llsee," she told reporters after giving a talk to University of California San Diego. "Inflationhasbeenparticularlystubborn,anditwouldbeamistakegivenalltheworkwe'vedonesofar tobasicallydeclarevictoryandthenitturnsoutthatactuallyinflationis heading up more, andthenwehavetogoback in."

"There are costs of prematurely declaring that inflation is on that sustainable downward path and so that's why I lean towards thinking that we're going to have to do some more," she said. The Labor Department's June CPI report Wednesday is expected to show headline CPI falling to 3.1% from 4.0% a month earlier and core CPI dipping three-tenths to 5.0%.

Shelter price rises, which has been the biggest contributor to inflation in recent months, are expected to slow but the risk of rents rebounding bears watching, Mester said.

JULY HIKE

The Cleveland Fed leader, who is not a voter on rates this year, said she is waiting to see all the data before making up her mind on a hike when the FOMC meets again later this month.

Her latest projections for the fed funds rate this year was "in the median or a little bit above." The median Fed policymaker in June penciled in two more hikes this year, which would take the target range to 5.5%-5.75%. (See: MNI INTERVIEW: Fed Could Hike Rates Three More Times-Kaplan)

"I'd like to get us to a point where the probability that the next move is an up move and the probability the next move is in a down move is about equal. We'll get to that point and then I think we hold there for a while as we assess incoming information. If I'm still biased towards thinking that we've got to move up, I prefer doing it," she said.

Feedback from business leaders in the Cleveland Fed district is "if you think you're having to move rates up, and you're pretty sure you're going to be doing it, then just get it done," Mester said.