Fed’s Mester signals potential rate hike, emphasizes need for persistence in tightening

Cleveland Fed President Loretta Mester hinted at the possibility of another interest rate increase during her recent speech on Monday night. She cautioned that rates might remain elevated for a considerable duration, with the ultimate timeline depending on the US economy’s resilience.

“We may need one more rate hike this year and an extended maintenance at that level while we gather more economic data and assess the effects of recent financial conditions tightening,” Mester said.

These actions are for steering the monetary ship in response to the current economic winds.

The Fed envisions one more rate hike this year, targeting a range of 5.5% to 5.75%, with the intent to maintain rates at this range for an extended period. Presently, rates are fluctuating within the 5.25% to 5.5% range.

Since March 2022, the Fed has implemented a substantial 11-rate hikes, marking one of the most aggressive rate-hiking sequences since the 1980s. Although inflation has receded somewhat, it still lingers at approximately 4%, roughly double the Fed’s desired target.

Mester acknowledges some progress in taming inflation but deems the existing level as excessively high. The primary focus for the Fed now pivots towards the duration of maintaining rates at their current levels.

“We may well be approaching or have already reached the peak of the fed funds tightening cycle,” Mester said.

“Our primary objective is to ensure that we sustain a restrictive monetary policy for an adequate period to regain confidence in achieving our 2% inflation target. However, we haven’t reached that point yet.”

Mester also states that she observes a moderation in demand and an improvement in supply conditions. Despite a robust job market, the gap between worker demand and supply is narrowing. It’s making easier for businesses to locate the necessary workforce.

Federal Reserve officials have consistently emphasized the necessity of rebalancing supply and demand to combat inflation effectively.

Fed Chair Jerome Powell last month said restrictive policy would be needed “for some time”. Powel visited York, Pennsylvania, to assess the economy on Monday. Meanwhile, New York Fed’s John Williams also emphasized the need for prolonged restrictive policy on Friday.