MNI: One More Fed Hike Likely, Then Hold For Some Time -Mester

A final interest rate hike will likely be needed to boost the fed funds rate to its cycle peak, where it will sit for some time to stabilize prices, Federal Reserve Bank of Cleveland President Loretta Mester said Monday.

The FOMC will carefully monitor economic, banking and financial market developments amid "considerable uncertainty" around the outlook so it can set monetary policy in a way that balances the costs of overtightening and under-tightening, she said. The slowdown in the Chinese economy, the possibility of an extended United Auto Workers strike and a potential government shutdown later this year all pose some risks. (See: MNI INTERVIEW: Long Shutdown Would Add To Reasons For Fed Pause)

"At this point, I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time as we accumulate more information on economic developments and assess the effects of the tightening in financial conditions that has already occurred," she said in remarks prepared for The 50 Club in Cleveland.

"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 on how the economy evolves relative to the outlook."

INFLATION EXPECTATIONS HIGH

Fed policy will need to be guided by actual progress on its dual mandate, on "whether the good rate of progress we have seen on inflation over the past three months is sustained and whether labor market conditions remain healthy as they moderate," Mester said.

Higher rates are helping to moderate demand while supply conditions are normalizing, she said. Firms are finding it easier to hire the workers they need, and inflation is falling.

Still, the risk that inflation will rise faster than expected remains greater than the reverse, Mester said. Higher oil prices could cause firms' and consumers' inflation expectations to rise, even as they've been "reasonably well-anchored" so far, she warned. Businesses in the Cleveland Fed region on average said they expect nearly 4% inflation for the year ahead and 3.2% for the next five years, "considerably higher than our target," she noted.

"We are likely near or possibly at the peak of the fed funds tightening cycle. Now our task turns to ensuring that we keep monetary policy restrictive for long enough to be confident that inflation returns to our 2% goal in a timely way."