MNI: Positive Fed Real Rates  Needed For Longer, Mester Says

The Federal Reserve will need to hold real interest rates positive for longer to bring inflation back to target, Cleveland President Loretta Mester said Monday.

"High inflation is proving to be more persistent, and more restrictive policy will be needed and for longer to ensure that inflation expectations do not move up and that inflation moves back down," she said at an MIT lecture in Cambridge, Massachusetts.

"It can be better for policymakers to act more aggressively because aggressive and pre-emptive action can prevent the worst-case outcomes," she said. Citing University of California Santa Cruz economist Carl Walsh's research, she added: "better economic outcomes are achieved by assuming that high inflation will be persistent and acting accordingly."

INFLATION COMPLACENCY

U.S. inflation is high and price pressures remain "very elevated and broad-based" in spite of some slowing in activity, Mester said. (See: MNI INTERVIEW: Scant Signs Inflation Pressures Abating - Altig)

She urged the Fed to guard against being complacent that inflation expectations are well anchored, at a time when dispersion in consumer inflation expectations has surged. (See: MNI INTERVIEW: Easing Price Expectations Little Comfort-UMich)

"I am going to be very cautious and not assume that one or two improved readings on inflation mean inflation is on a downward path or that inflation expectations are firmly anchored at our goal when expectations measures are elevated," she said. "Wishful thinking cannot be a substitute for compelling evidence."

To tame inflation, "monetary policy will need to be in a restrictive stance, with real interest rates moving into positive territory and remaining there for some time," she said.

"There will be some pain and bumps along the way as the growth in output and employment slow and the unemployment rate moves up," she said. "I do not view the current situation as one in which there is a tradeoff between our two monetary policy goals. If we were to fail to take decisive action to get inflation down and firmly anchor inflation expectations, the costs would be high."