Interest Rates Should be Above 5% for Some Time

Fed Reserve Bank President says the interest rates should be above 5% for some time.
The next report is scheduled on April 12, 2023, and will decide the course of action.

Federal Reserve Bank (FRB) Cleaveland President Loretta Mester suggested that interest rates should remain at the 5% mark for some time to fight inflation. Mester sees this level as a point that could ease the pressure quickly. The current inflation rate has been 6% for the last 12 months ended on February 2023, down from 6.4%. As per the report released on March 14, 2023, the next report is scheduled on April 12, 2023.

Will Keeping Interest Rates at 5% Help?

In an event at the Money Marketeers of New York University on April 4, 2023, Mester argued that, to keep inflation down at a stable rate of 2%, the monetary policies will have to move into troubled waters. Moving the Fed rates to 5% and keeping Fed funds dry or in a positive territory could help avoid the sucking whirlpool.

Fed officials raised interest rates by 0.25% last month, pulling the rates from 4.75% to 5%, which were close to zero last year. Reportedly, 18 officials favored moving the rates to 5.1% by year-end.

In a Q&A session after her remark, Mester talked about being comfortable with the decision to raise the interest by a quarter percentage point in March 2023. The Fed had to deal with consequential bank failures during the time. She pointed out that the situation seems stable and praised the Fed officials for handling the situation.

There are rare chances that the policymaker could cut rates in 2023.

How Long Will Interest Rates be in the Higher Range?

Policymakers are keeping a close watch on the economic data to point out the effects of the recent banking crisis and how it curtailed access to credit or slowed the economy. At the same time, the central bank is expected to raise rates once more this year.

Mester said the limit of these interest rate hikes would be determined after analyzing how long it will take to cool the economy from the inflationary pressures. Moreover, how long the policy needs to be limiting will depend greatly the rate of decline of inflation expectations, which will be related to how much the demand is slowing along with the supply challenges and their resolution.

Mester strongly believes that some worthwhile improvement in inflation rates can soon be expected, as the price rise is lowering to almost 3.75% in 2023. This number is close to the 2% goal set by the central bank in 2025.

Latest economic reports indicate that the economy is cooling down but requires further cooling to freeze inflation worries. The parameters followed by Fed officials show that although the core prices have cooled in March 2023, inflation climbed close to the 5% mark, which is more than double what the Fed’s target rate of 2%. The upcoming report would influence the decision to be taken on May 2-3, 2023 policy meeting.

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