Federal Reserve Bank of Cleveland President Loretta Mester recently expressed her concerns regarding inflation risks, stating that she still sees them as tilted to the upside. Despite some positive news in the latest data, Mester believes that the risks to inflation remain elevated. In an interview at Bloomberg’s New York office, she also mentioned that the median projection of policymakers’ latest forecasts aligns closely with her own outlook for the economy. Mester emphasized that the risks to inflation are still on the upside, while the labor market faces dual-sided risks.
Mester acknowledged the softer-than-expected inflation figures released earlier in the week as a “great gift.” The consumer price index, excluding food and energy, increased by 0.2% in May and 3.4% from a year earlier, marking the slowest pace in over three years. While Mester recognized the progress made on inflation in the past two years, she highlighted that it is still too high. She mentioned the need for further reports to confirm a downward trajectory towards the target of 2% inflation before considering rate adjustments.
During the latest policy meeting, Federal Reserve officials tempered expectations for interest rate cuts this year, with the median projection indicating just one rate reduction. The benchmark rate was maintained at a target range of 5.25% to 5.5%, a level first reached in July, which was a two-decade high. Mester noted that she did not revise her projections after the release of the Consumer Price Index (CPI) data, emphasizing the importance of additional data points to confirm a sustained decline in inflation. She stressed the need for confidence in inflation moving towards the target before considering a less restrictive monetary policy.
Looking ahead, Mester shared her latest projection for interest rates settling at 3% in the longer term. Policymakers slightly increased their expectations for the long-term rate to 2.8% in June, indicating a belief that rates may not return to pre-pandemic levels. Despite the adjustments in rate projections, there is uncertainty surrounding the future path of interest rates and their impact on the economy. Mester’s successor, Beth Hammack, who brings a wealth of experience from Goldman Sachs Group Inc., will assume the role later this year, transitioning from Mester’s decade-long tenure as the Cleveland Fed chief.
The Federal Reserve Bank of Cleveland’s outlook on inflation and interest rates reflects a cautious approach to policy adjustments. With concerns of upside inflation risks persisting, policymakers are closely monitoring economic data to determine the appropriate course of action. As the transition to new leadership takes place, the central bank’s decisions will continue to shape the trajectory of monetary policy and its impact on the broader economy.