Loretta J. Mester, president and CEO of the Federal Reserve Bank of Cleveland, stated that beating inflation will likely require one more U.S. interest-rate hike followed by a period of holding rates steady. She mentioned that she may reconsider her previous view that rate cuts could begin in late 2024. Mester made these remarks during an interview at the Jackson Hole Economic Symposium in Wyoming. She emphasized the importance of setting policy in a way that ensures inflation reaches the Fed’s 2% goal by the end of 2025, without causing the economy to collapse.
Mester expressed her concern about inflation drifting further away from the target and the negative consequences it has on the economy and American households. She explained that allowing inflation to persist above 2% leads to a higher price level, which ultimately hurts households. She emphasized the timeliness of addressing inflation to mitigate these negative effects.
In June, Mester and most other Fed policymakers believed that once the policy rate reaches the range of 5.5%-5.75%, they would likely stop hiking rates. They also anticipated that the Fed would begin cutting rates next year to avoid unnecessarily restricting the economy as inflation falls. However, Mester acknowledged that her stance on rate cuts in the second half of 2024 might change when she submits fresh forecasts ahead of the September rate-setting meeting. She emphasized the need to reassess the speed at which inflation is declining.
Mester acknowledged that economic growth has been stronger than expected and the labor market remains tight. She believes that the Fed’s rate hikes thus far will moderate the strength of both factors. However, she remains cautious about assuming that inflation will return to 2% in a timely manner, despite its decline from last year’s peak. Mester emphasized the importance of not prematurely loosening policy and expressed her commitment to calibrating policy to achieve 2% inflation by the end of 2025.
Mester mentioned that the Fed’s next rate hike does not necessarily have to occur in September but is likely to happen this year. She is currently running the numbers for her September forecasts and will adjust her stance if it appears that delaying the achievement of 2% inflation would harm the economy. However, she expressed confidence in bringing inflation down to 2% without causing damage to the real side of the economy.
In conclusion, Mester’s remarks at the Jackson Hole Economic Symposium highlighted the importance of addressing inflation and setting policy to achieve the Fed’s 2% inflation goal by the end of 2025. She emphasized the need to reassess rate cuts and expressed confidence in bringing inflation down without harming the economy.
