According to Federal Reserve Bank of Cleveland President Loretta Mester, policymakers should raise their benchmark interest rate by over 5% this year. They have to maintain it there for a while to contain inflation. The precise amount should depend on how quickly price pressures subside.
Last month, Fed officials increased interest rates by a quarter point. It moved its policy benchmark from near zero a year earlier to a target range of 4.75% to 5%. According to projections, the 18 officials predicted rates to reach 5.1% by the end of the year.
Mester said she was “very comfortable” with the Fed governors’ decision to raise rates by a quarter percentage point in March, despite a succession of bank failures that caused tremors in the financial markets, in a question-and-answer session that followed her speech. She stated that it appears to have steadied at the moment so far. She also mentioned steps taken to stop the spread of the crisis by the Fed and other regulators.
No Cuts
She added that she does not believe rate cuts would occur this year from policymakers.
Since the conference, policymakers have stated that they are monitoring economic statistics to assess the extent. Recent banking stress may restrict access to credit or impede the economy. Per policymakers’ most recent quarterly predictions, the US central bank is on track to increase interest rates once more.
Mester believes that the eventual level of interest rates will depend on how long it takes for the economy. It will slow down and for price pressures to subside.
She said that how much inflation and inflation expectations are moving down will depend on how much demand is slowing, supply issues are being resolved, and price pressures are easing, and depending on how much higher the federal funds rate needs to rise from here and how long policy restrictions are needed to remain in place.
According to Bloomberg News, while the economy is calming, more cooling is still needed to allay inflation fears. The core pricing pressures lessened in March. But according to Fed’s preferred inflation gauge, headline inflation increased by 5% from a year earlier, which is still more than the Fed’s 2% target. The March jobs data, coming on Friday, will also have an impact on the decision for the May 2-3 policy meeting.
Systems Sound
Mester stated that the US banking sector is stable and that officials will monitor how much credit availability tightens in the wake of the current crisis and adjust monetary policy as necessary.
Mester further exclaimed that, moving forward, Fed policymakers will continue to evaluate the scope and duration of these effects. Their implications for the outlook for employment and inflation and, consequently, for formulating the best possible monetary policy.
