Fed needs to raise rates to 4% and ‘hold them there’

Cleveland Fed President Loretta Mester says the Federal Reserve needs to continue raising interest rates and hold them at higher levels to get inflation under control.

“There’s still a lot of inflation out there and I think we’re going to have to move interest rates up and continue to do that until we get compelling evidence that inflation is moving back down,” Mester told Yahoo Finance in an interview at the Jackson Hole economic symposium.

“We’re going to have to get interest rates up probably a little above 4% by sometime early next year, and hold them there.”

Mester’s comments came after Fed Chair Jay Powell made a strong case to bring down inflation in his speech Friday morning, saying: “We will keep at it until we are confident the job is done.”

The Fed worries the longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.

“It will be less costly to do this now than to fail on that mission,” said Mester.

Loretta J. Mester, president and CEO of the Federal Reserve Bank of Cleveland, looks on at Teton National Park where financial leaders from around the world gathered for the Jackson Hole Economic Symposium outside Jackson, Wyoming, U.S., August 26, 2022. REUTERS/Jim Urquhart

Loretta J. Mester, president and CEO of the Federal Reserve Bank of Cleveland, looks on at Teton National Park where financial leaders from around the world gathered for the Jackson Hole Economic Symposium outside Jackson, Wyoming, U.S., August 26, 2022. REUTERS/Jim Urquhart

The Fed has raised short-term interest rates to a target range between 2.25% and 2.5%, moving 0.25% in March, 0.50% in May, and 0.75% in both June and July. Headline CPI inflation rose to 9.1% over the prior year in June before moderating to an 8.5% increase in July. Much of this decline was due to a drop in energy costs as gas prices fell.

Mester says while July’s inflation report was welcome news, the volatility of gas prices makes this single data point far from a broader signal that inflation pressures will moderate going forward.

“It’s premature to even think that inflation has peaked and that it’s on that downward trend,” she said. “We want it to be on a sustainable downward trend.”

Mester said Friday she needs to see several months of evidence that prices are moving back down, specifically pointing to rents, which remain high.

While Mester believes the Fed should keep hiking rates above 4% to get inflation under control, she doesn’t believe that will cause a recession, noting the strong job market. But Mester does expect growth will slow below trend for awhile, causing the unemployment rate to rise. Mester is forecasting economic growth below 2% with the unemployment rate rising to 4- 4.25%.

The economy contracted in the first two quarters of the year, while the unemployment rate in July stood at 3.5%. Mester said growth will ultimately depend on how fast demand moderates, how fast inflation comes down, and whether constraints on the supply side ease.

“That’s going to be painful for the people that that affects,” says Mester. “But the alternative is also very painful. We cannot continue having a strong labor market and get back to those very strong labor market conditions we had in the previous 10 year plus expansion, unless we get inflation under control.”

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Source: https://finance.yahoo.com/news/cleveland-fed-mester-jackson-hole-205608216.html