MNI: Fed Weighs Credit Conditions As It Ponders Hikes-Mester

Further interest rate hikes from the Federal Reserve will depend on the magnitude and duration of tighter credit conditions stemming from recent tensions in the banking system and the extent of the drag on inflation and growth, Cleveland Fed President Loretta Mester said Tuesday.

Mester, who tends to be on the hawkish side of the Fed’s monetary debates, did not specify whether she supports raising interest rates at the central bank’s next meeting in May, a break from past speeches where she has been fairly specific about her preferred rate path.

“Fed policymakers are committed to bringing inflation back to our 2% goal. Given where we are on that journey, I plan to remain diligent in setting monetary policy to return the economy to price stability in a timely way and to be judicious in balancing the risks so as to minimize the pain of the journey,” she said in prepared remarks to the Money Marketeers of New York University.

Mester said stresses on the banking system have been easing given a robust official response to the crisis, including a new emergency lending facility from the Fed. “But the Fed continues to carefully monitor conditions and is prepared to take further steps as necessary to ensure financial stability,” she said.

She expressed concern that households and businesses might respond to the banking turmoil by curtailing spending.

MONITORING EFFECTS

“Fed policymakers will continue to assess the magnitude and duration of these effects and their implications for the outlook for inflation and employment and, therefore, for appropriate monetary policy,” Mester said.

Former Dallas Fed President Robert Kaplan told MNI he believes credit to medium and small businesses is already freezing up, and worries that the sector could be hampered more deeply in the long-run if strains linger.

Mester said U.S. workers wages were still rising too rapidly for the Fed’s comfort. “By some measures, wage pressures are beginning to ease, but wages are still growing at an annual rate of about 4-1/2 to 5%,” she said.

“This is well above the level consistent with 2% inflation given current estimates of trend productivity growth. Indeed, for wage growth at this pace to be consistent with price stability, trend productivity growth would need to be 2-1/2 to 3%, instead of the current estimates of 1 to 1‑1/2%."