(Bloomberg) — Federal Reserve Bank of Cleveland President Loretta Mester said that the central bank should be able to start cutting rates later this year, though she first wants to see more evidence that inflation is cooling further.
Most Read from Bloomberg
The economy and monetary policy are in a good place right now, Mester, a voting member of the Federal Open Market Committee this year, said Thursday in prepared remarks for a virtual speech at the European Economics and Financial Centre. Price gains slowed significantly last year, but that pace of disinflation may not continue this year, warranting careful vigilance from policymakers, she said.
“I will gain confidence when I see inflation continuing to move down,” Mester said. “The FOMC will then be in a position to start reducing the level of restrictiveness by moving the fed funds rate down. If the economy performs as anticipated, I expect we will find ourselves in that position sometime later this year.”
Mester’s comments echoed ones she made last week, when she added that three rate cuts will likely be appropriate this year. Her colleagues have made similar remarks recently. Fed Chair Jerome Powell said in congressional testimony on Thursday that the central bank will likely cut rates at some point this year, but that policymakers still need to see more evidence that inflation is on a sustainable path down to their 2% target.
‘Bigger Mistake’
Fed officials will be focused this year on managing the risk between holding rates at high levels for too long, thus risking pain in the labor market, and cutting too soon and spurring a resurgence in inflation, Mester said.
“But at this point, I think the bigger mistake would be to move rates down too soon or too quickly without sufficient evidence that inflation is on a sustainable and timely path back to 2%,” she said.
Speaking on CNBC later, Mester said she wants to see “a couple more data points” showing inflation is continuing to move down.
Mester said policymakers need to be careful in assuming that inflation will cool as rapidly as it did last year, when the Fed’s preferred inflation gauge moved from 5.5% in January to 2.6% by December. Inflation reports for January showed a slight uptick in monthly prices, with the core personal consumption expenditures index advancing 0.4% from December, the fastest pace in a year.
Easing of supply-chain pressures and a better balanced labor market likely contributed to the rapid decline last year, Mester added, and may not provide as much assistance this year.
“Even so, I do expect inflation to continue to move down over time to our 2% goal, even if it proves to be somewhat more persistent this year than last year,” she said.
Should inflation stall, the Fed can keep rates at restrictive levels for longer, Mester said.
Mester noted that productivity may be higher as businesses invest in technology such as AI to become more efficient. That may lead her to revise higher her forecast for the long-term federal funds rate, though she hasn’t yet made up her mind. Policymakers will publish a fresh set of projections at their March 19-20 meeting.
Mester is 65, the mandatory retirement age for reserve bank presidents, and will step down in June.
(Updates with additional Mester comments in seventh paragraph.)
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.