MNI: Mester Says Fed's Policy Rate Not Yet Restrictive

The Federal Reserve's current interest rate setting is not yet restrictive and will need to continue to move up so that real interest rates move into positive territory and then remain there for some time, Cleveland President Loretta Mester said Tuesday.

"Despite some moderation on the demand side of the economy and nascent signs of improvement in supply side conditions, there has been no progress on inflation," she said at an Economic Club of New York luncheon. "The month-to-month changes in the inflation measures have shown no real decline, so we cannot even say inflation has peaked yet, let alone that it is on a sustainable downward path to 2 percent."

Adjusting the current nominal fed funds rate range of 3% to 3.25% by the SEP median projection for inflation next year, which is 2.8%, policy "is still a tad accommodative," she said. "Further funds rate increases are needed to get policy into a restrictive stance," she said, noting she sees more persistence in inflation than the median SEP projection and submitted a "bit higher" fed funds rate view than the median 4.6% for 2023.

Mester said she does "not anticipate any cuts in the fed funds target range next year," but "let me emphasize that this is based on my current reading of the economy and outlook, and I will adjust my views as warranted based on the implications of incoming economic and financial information for the outlook and risks around the outlook."

YEARS ABOVE TARGET

"In my view, even with appropriate monetary policy actions, given inflation dynamics, it will take a couple of years before inflation returns to the Fed’s 2% goal," she said, noting she sees inflation moving down appreciably next year to about 3.5% and reaching the Fed's 2% goal in 2025.

The Cleveland Fed chief also cited recent developments in Ukraine as a reason for why gas and energy prices may move higher again later this year, which could again cause inflation expectations to move up again. "The recent declines in medium- and longer-term expectations occurred as gasoline prices declined; the jury is still out about whether these readings will rise again if gasoline prices move back up."

Mester said there has been some signs of moderation in the labor market. "The number of job openings has fallen this year, but there are still 1.7 openings per unemployed person. Back in 2019, another time of tight labor markets, there were about 1.2 openings per unemployed worker."

(See: MNI INTERVIEW: Fed Cheers Cooling Labor Demand As Openings Dip)

Seeing the unemployment rate moving up to 4.5% by the end of next year and up a bit more in 2024, the Cleveland Fed chief said, with trend productivity growth estimated to be around 1.25% to 1.5%, nominal wage growth will need to moderate to around 3.25% 3.5% to be consistent with price stability.