Fed’s Mester casts doubt on the need for ‘shock’ interest rate hikes ahead

Cleveland Fed President Loretta Mester said Friday that she favors raising interest rates quickly to reduce inflation, but not so quickly as to disrupt the economic recovery.

That means a strong chance of backing a 50 basis point rate hike at the next Fed meeting and maybe a few more afterwards, but not going as high as 75 basis points, as St. Louis Fed President said. , James Bullard, suggested earlier this week. A basis point is 0.01 percentage point.

“My own view is that we don’t need to go there right now,” Mester said on CNBC’s “Closing Bell” when asked about the 75 basis point move by host Sara Eisen. “I would prefer to be more deliberate and more intentional about what we are planning to do.”

Mester said she would like the Fed to achieve its benchmark overnight lending rate of 2.5% by the end of this year, a rate she and many Fed officials see as “neutral” or one that neither encourages nor represses. growth.

The fed funds rate sets what banks charge each other for overnight loans, while also serving as a benchmark for many forms of consumer debt. It is currently in a range between 0.25% and 0.5%, after an increase of a quarter of a percentage point in March.

“I would support at this point where the economy is up 50 basis points and maybe a few more to get to that 2.5% level at the end of the year,” Mester said. “I think that’s a better way… I’m all for this methodical approach, rather than a 75 basis point shock.” [increase]. I don’t think it’s necessary for what we’re trying to do with our policy.”

His comments dovetail with what Chairman Jerome Powell said Thursday.

Although the statements by both officials were also in line with recent Fed communications, they coincided with a new round of selling on Wall Street in both stocks and bonds.

Mester called the Fed’s pivot policy from historically high levels of accommodation during the pandemic era “the great recalibration of monetary policy.”

“We are trying to let the markets know where we see the economy going and why monetary policy needs to move away from that extraordinary real level of accommodation that was needed at the start of the pandemic,” he said.

“Of course, our goal is to do it in a way that sustains expansion and maintains healthy labor markets,” Mester added.

According to the CME Group FedWatch tracker, the market price currently indicates that the Fed is taking the funds rate a little further than Mester indicated, possibly to 2.75% after anticipated increases of 50, 75, 50, 25, 25 and 25 basis points respectively at its remaining six meetings through the end of the year.