A 2.5% fed funds rate could still be accommodative, Cleveland Fed President Loretta Mester tells MNI.
(Repeats article first published on May 17.)
The Federal Reserve likely needs to move monetary policy to a restrictive stance to contain inflation, Cleveland Fed President Loretta Mester told MNI Monday, warning that the Fed's estimate of the nominal longer run fed funds rate of 2% to 3% might still leave policy too accommodative.
"With inflation as high as it is, and with expectations for inflation above 2%, you need to take into account that -- at least on the short end -- we’re still at an accommodative stance of policy. And even if we get up to 2.5%, depending on what’s happening on the inflation and expected inflation, we may still be accommodative," she said in an interview.
"When you’re assessing the stance of policy, you have to be also looking at real rates because that’s really what matters for the economy."
She reiterated her support for two more 50 basis point rate increases in June and July before reassessing whether a "more aggressive" pace will be required to tame price rises.
"I would like the fed funds rate to be at neutral certainly by the end of the year, but we have to continue to assess that and see how the economy is evolving," she said. "I do think we’ll have to go above neutral myself, but I can’t really tell you today how much above neutral we’ll have to go."
'MORE AGGRESSIVE' IF NEEDED
The policy path will depend critically on whether the Fed's recalibration of borrowing costs is bringing demand and supply into balance to help alleviate underlying price pressures, Mester said.
The war in Ukraine and Covid-19 lockdowns in China have increased the upside risk to inflation on the supply side. Meanwhile, firms' inability to find workers have led to "pretty sizeable wage increases" that aren't sustainable, she said.
A risk management approach requires the central bank to consider not only the probability of a bad outcome but also the potential cost of one.
"The longer the inflation readings stay up, the more chance is that longer term expectations can move higher than levels consistent with our 2% goal, and that’ll make it much more costly to bring inflation down," Mester said.
"Two more 50s sounds like a plausible strategy, and then we’ll have more information to see how the economy is evolving. Perhaps inflation is coming back down better even than we thought, and we can adjust the pace. Or if it hasn’t moved in the right direction, and some of the upside risks have manifested themselves, then we may have to be a little more aggressive."