(Bloomberg) — Federal Reserve Bank of Cleveland President Loretta Mester said officials need to keep raising interest rates and cannot get complacent as they work to battle the strongest inflation in a generation.
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“Given the current level of inflation, its broad-based nature, and its persistence, I believe monetary policy will need to become more restrictive in order to put inflation on a sustainable downward path to 2%,” Mester said Tuesday in a speech to The Economic Club of New York.
She said that US central bankers must weigh the risk of tightening too much against not doing enough, but “at this point the larger risks come from tightening too little and allowing very high inflation to persist and become embedded in the economy.”
Fed officials are rapidly raising interest rates as they work to quell inflation running near the highest level in four decades. Policymakers appear poised to deliver their fourth straight 75-basis-point hike when they meet early next month.
Median projections released by the US central bank on Sept. 21 revealed that officials see their benchmark rate rising to 4.4% by the end of this year and 4.6% by the end of next year, up from the current target range of 3% to 3.25%.
Mester, who votes in monetary policy decisions this year, repeated that she sees rates rising slightly higher than the median projection because she expects inflation to be more persistent.
She also spelled out that she needs to see monthly numbers on inflation and core inflation declining before slowing the pace of rate hikes.
“My read right now is that we still have very high inflation. We have not seen any progress really on inflation and so I think we need to bring interest rates up and I think we need to bring them up through this year and a little bit into next year,” she told reporters after her speech.
Fed rate hikes have sent the dollar surging on foreign exchange markets and contributed to sharp swings in financial markets globally.
Mester told reporters that policymakers monitor markets for potential vulnerabilities and for spillovers onto the US economy, but she wasn’t seeing anything alarming.
“There’s no evidence that there’s disorderly market functioning going on at present,” she said. “But we have to be cognizant when you’re raising interest rates and you saw mortgage rates go up as much as they did and you have interlinkages between financial markets.”
A strong September jobs report showed the US labor market remains resilient, with the unemployment rate dropping to 3.5%, matching a five-decade low. Officials will also review fresh inflation data released on Oct. 13.
The Cleveland Fed chief said she sees inflation moving “down appreciably” next year to about 3.5% and reaching the central bank’s 2% target in 2025. The path to lower inflation will require below-trend economic growth, lower employment gains and could include greater financial volatility.
But despite the uncertainty, Mester said officials need to take decisive action to rein in prices.
“Being cautious does not mean doing less,” she said in her speech. “Instead, it means being very careful to not allow wishful thinking to substitute for compelling evidence, leading one to prematurely declare victory over inflation and pause or reverse rate increases too soon.”
(Updates with Mester comments to reporters from eighth paragraph.)
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