Federal Reserve Bank of Cleveland President Loretta Mester has called for tighter financial conditions in the United States to get inflation back to the central bank’s 2% target.
During a speech on Monday, Mester — one of several non-voting members of the Federal Open Market Committee (FOMC) — explained that additional policy firming may be needed to achieve price stability over the long run.
“I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time as we accumulate more information on economic developments and assess the effects of the tightening in financial conditions that have already occurred,” Mester told members of the 50 Club, a Cleveland-based organization of business leaders and lawyers.
However, Mester said that a final decision was not set in stone and would depend on how the economy evolved relative to the ongoing economic slowdown in China, the possibility of an extended strike by United Auto Workers, and a potential government shutdown later this year.
“Whether the fed funds rate needs to go higher than its current level and for how long policy needs to remain restrictive will depend on how the economy evolves relative to the outlook,” she said.
At its recent policy meeting in September, the FOMC unanimously voted to hold the target range of the fed funds rate steady at 5.25-5.50%, as previously reported by The Dallas Express.
In addition to temporarily pausing rates in September, FOMC members released their updated Summary of Economic Projections. According to the results, the median forecast is for one more rate increase in 2023 and then for monetary policy to remain at a sufficiently restrictive level until data indicate that inflation is returning to the 2% target.
Although Fed participants recognize the damage inflation has on everyday consumers, Mester said that “medium- and longer-term inflation expectations remain reasonably well-anchored in a range consistent with the Fed’s goal of 2% inflation.”
While the Federal Reserve has made some progress on inflation since beginning its tightening cycle in March 2022, the consensus among members is that inflation remains too high.
“Now our task turns to ensuring that we keep monetary policy restrictive for long enough to be confident that inflation returns to our 2% goal in a timely way,” Mester said. “We are not there yet, but we will get there because price stability is critical for the long-run health of the labor market, the overall economy, and the stability of the financial system.”
The next FOMC meeting will be held on November 1, 2023.