Mester Says The Fed's Rate Target Must Go Above 5%

It is likely that the Federal Reserve Bank of Cleveland, which is headquartered in Cleveland, will continue to hike interest rates in the near future, according to its president, Loretta Mester. This is amid signs that the recent troubles in the banking sector have been contained.

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She stated that monetary policy will be moved into somewhat restrictive territory this year, in order to keep inflation on a sustained downward trajectory and to anchor inflation expectations. The Fed Funds Rate will move over 5% and the Real Fed Funds Rate will remain in positive territory for a while in order to keep inflation on a sustained downward path to 2%.

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In the speech that Mester gave before a group of economists in New York, the speaker said that, in order for the Federal funds rate to be raised further, and for the policy to remain restrictive, the amount of inflation and inflation expectations that will need to be moved down will determine how much the demand for goods and services is slowing, whether supply challenges are being addressed, and how much price pressures are easing.

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Despite banking sector troubles, the Fed raised rates by a quarter percentage point in late March, citing financial tightening as weighing on economic growth.

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As Mester noted in remarks after her speech, authorities had taken steps to manage the risks associated with the troubled banking sector, so she was confident of moving forward with the rate increase.

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In addition to penciling in a single additional rate rise for this year, Fed officials also backed the idea of raising short-term borrowing costs in the pursuit of a reduction in inflation at this policy meeting.

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Despite the fact that Mester does not have a vote on the Federal Open Market Committee this year, she made the following statement in her remarks: "My forecast is similar to that of the FOMC members, released two weeks ago, but I see some persistent pressures on inflation greater than those that are expressed by the median forecaster."

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As well as rebutting market expectations, she also threw some shade on the markets' view that central bankers will have to cut rates much sooner than markets anticipate. She said, "I can come up with scenarios that would result in the Fed cutting rates sooner than I currently anticipate. Is my modal forecast the right one?".

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Despite the troubles in the banking sector, Mester said he is confident that they will ultimately be contained.

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“It's a great relief to know that the U.S. banking system is sound and resilient in the face of the stresses experienced in March, but the Federal Reserve is continuing to carefully monitor conditions in the banking sector and is prepared to take any necessary steps to ensure financial stability if necessary."

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It is expected that growth and hiring will slow down in the near future and that inflation pressures will ease in the months to come.

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According to Mester, inflation should improve from its current rate of 5% to 3.75% this year and 2% by 2025, after easing from 5%.

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By 2023, unemployment should rise from 4.5% to 4.75% from 3.6% at present. The growth rate is expected to fall below trend levels this year and bump up next year.