MNI: Fed's Mester: Rates 'Likely Near Or At A Holding Point'

Federal Reserve Bank of Cleveland President Loretta Mester said Friday interest rates are "likely near or at a holding point" as the Fed closes in on the end of the tightening cycle.

Most Fed officials in the September projections saw one more rate hike this year and that is "consistent with my own reading of economic conditions, the outlook, and the risks to the outlook," she said. "But whether the fed funds rate needs to go higher than its current level and for how long policy needs to remain restrictive will depend importantly on how the economy evolves relative to the outlook and how the risks are changing," Mester said. "To guide my policy views, I will be carefully assessing incoming evidence to determine whether the economy is evolving as expected."

"Regardless of the decision made at our next meeting, if the economy evolves as anticipated, in my view, we are likely near or at a holding point on the funds rate as we accumulate more information on economic and financial developments and assess the effects of the tightening in financial conditions that has already occurred," she said in prepared remarks.

"Given the outlook, I anticipate it will be appropriate to keep the funds rate at its peak for some time."

RISK MANAGEMENT

There has been discernible progress on inflation even while the overall economy has remained relatively strong, but risks to the inflation forecast remain tilted to the upside, she said. Labor market conditions also paint a picture of resilience but should continue to moderate.

Risk management considerations are becoming increasingly important, she said. "Tightening too much would slow the economy more than necessary and entail higher costs than needed to get inflation back to our goal. Tightening too little would allow high inflation to persist, with short- and long-run consequences, and would necessitate a much longer and more costly journey back to price stability."

Estimates of the short-run neutral interest rate rose in the aftermath of the pandemic, but whether the increase will persist is an open question, she said.(See: MNI INTERVIEW: More FOMC Members Set To Raise R-Star-Rosengren and MNI POLICY: Lively Debate At Fed Over Possible R-Star Rise)

Mester added that, if sustained, the increase in longer-term yields will help to moderate demand. "It will be one of the factors I consider when evaluating the appropriate path of monetary policy going forward."