Fed walking pace from September depends on inflation, says Mester

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(Bloomberg) — Federal Reserve Bank of Cleveland president Loretta Mester said she prefers to raise interest rates by 50 basis points this month and next, but warned the pace could accelerate or slow down from September, based on of what happens to inflation.

“If by the September FOMC meeting, monthly inflation data provides compelling evidence that inflation is declining, the pace of rate hikes could slow,” Mester said Thursday, citing the Federal Open Market Committee’s policy-making Federal Open Market Committee. “But if inflation hasn’t eased, a faster rate of rate hikes may be needed,” she told a virtual event hosted by the Philadelphia Council for Business Economics, according to her prepared remarks.

Fed officials raised their benchmark rates by half a point in May and indicated that similar rate hikes are coming in June and July as they try to raise rates quickly to levels that won’t stimulate or slow the economy. Minutes from the Fed’s May meeting show that officials are more open to what to do in September, based on what happens to inflation.

Atlanta Fed President Raphael Bostic said last month the central bank might consider taking a break in September if inflation falls faster than expected over the summer. But earlier Thursday, Fed Vice Chairman Lael Brainard said it would be “very difficult” to see such a pause as policymakers squelch the strongest inflation in decades.

Mester, who will vote on monetary policy decisions this year, said she would need to see “compelling evidence” that inflation is on the decline, including several months of declining readings, before concluding that inflation has peaked. “I will have to see several months of continued downward monthly inflation readings. I haven’t seen that yet,” she says.

Officials are also beginning to settle the Fed’s $8.9 trillion balance sheet, a process that should drive interest rates higher. Fed officials have their next policy meeting in two weeks on June 14-15.

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