(Bloomberg) — Federal Reserve Bank of Cleveland President Loretta Mester suggested she’s not in a rush to begin cutting interest rates, saying policymakers will probably gain confidence to cut rates “later this year” if the economy evolves as expected.
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Meantime, she said Fed officials want to see more evidence that inflation is cooling toward their 2% target, and cautioned against lowering borrowing costs too soon.
“It would be a mistake to move rates down too soon or too quickly without sufficient evidence that inflation was on a sustainable and timely path back to 2%,” Mester said Tuesday in prepared remarks for an event in Columbus, Ohio. “If the economy evolves as expected, I think we will gain that confidence later this year, and then we can begin moving rates down.”
Mester, who votes on monetary policy this year, said last month that it was probably too early to consider cutting rates at the March Federal Open Market Committee meeting. Several Fed officials including Chair Jerome Powell have made similar remarks in recent weeks.
Speaking in a call with reporters after her speech, Mester said she still expects three rate cuts this year, consistent with the forecast she submitted ahead of the Fed’s December meeting. She added that the rate cuts don’t necessarily need to come at the quarterly meetings when the Fed releases those forecasts, known as the Summary of Economic Projections.
“I don’t think tying when we move to the SEP is necessary, as long as we’re communicating well,” Mester said.
The Cleveland Fed chief added that a resilient labor market and strong economic growth give the US central bank time to assess incoming data, while keeping rates at current levels, to make sure that inflation keeps falling as it has been. At the same time, she pointed to several risks to the economic outlook, including heightened geopolitical risks, easing financial conditions, banking-sector stress around commercial real estate lending and an unexpected deterioration in the labor market.
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Policymakers have held interest rates in a range of 5.25% to 5.5% since July and have signaled that the next move is likely a cut. Markets had anticipated that to come at the Fed’s next meeting, in March, but have pivoted those bets to the May or June meetings following commentary from Fed officials and a robust January jobs report.
Monetary policy right now is in a “good place” to assess the various risks to the Fed’s outlook, Mester said. Once the Fed starts cutting rates, it will likely do so at a gradual pace, she added.
“The FOMC’s job now is to ensure that the economy reaches an even better place by calibrating monetary policy to achieve our dual mandate goals of price stability and maximum employment,” Mester said. “Risk management will take center stage.”
Increased productivity and strong employment growth could mean that the neutral rate of interest, where policy is neither stimulative nor restrictive, has moved up in the post-pandemic economy, Mester said. That could mean policy needs to stay restrictive for longer to fully restore price stability and maximum employment, she said.
Mester also said it will likely be appropriate for the Fed to begin slowing the pace at which it allows maturing assets to roll off its balance sheet — a process known as quantitative tightening — at some point this year, though there’s no urgency to do so now.
Mester announced last year that she will step down in June after reaching the mandatory retirement age of 65.
(Updates with additional Mester comments in fifth paragraph.)
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