(Bloomberg) — Federal Reserve Bank of Cleveland President Loretta Mester said she wants to see more evidence that inflation is headed lower before cutting interest rates, but noted recent figures have generally aligned with her expectation for slower progress on price growth.
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Mester, a voter on this year’s policy-setting committee, said the higher-than-hoped inflation readings from the beginning of the year largely just confirmed the bumpy nature of disinflation. She said she still believes price growth will continue to cool toward the Fed’s 2% goal, just at a slower pace than last year.
“But I need to see more data to raise my confidence,” Mester said Tuesday in prepared remarks for an event at the Cleveland Fed. “Some further monthly readings will give us a better sense of whether the disinflation process is stalling out or whether the start-of-the-year readings reflect a temporary detour on the downward path back to price stability.”
Mester said her forecasts are similar to the median estimates in the economic projections released after the Fed’s March meeting, in which policymakers penciled in three rate cuts for 2024 — albeit narrowly. The Cleveland Fed chief said she doesn’t think she will have enough data to warrant lowering rates at the Fed’s upcoming meeting on April 30-May 1.
Mester said she does anticipate higher inflation than the median Fed official in 2024 and repeated that rate cuts will likely start later this year. She also said she raised her long-term federal funds rate forecast to 3% from 2.5%.
Disappointing Data
Fed officials kept interest rates unchanged in a range of 5.25% to 5.5% at their March 19-20 meeting. And while policymakers’ median estimate for rate reductions this year held at three, disappointing inflation data at the start of 2024 has concerned some officials.
A report Friday showed that the core personal consumption expenditures price index — which excludes food and energy costs — rose 0.3% in February after climbing 0.5% in the previous month, marking its biggest back-to-back gain in a year. The measure is up 2.8% from a year earlier, still above the Fed’s 2% target.
Mester added that the Fed’s goals of maximum employment and price stability are coming into better balance now. Policymakers can cut rates sooner than expected if the labor market deteriorates and can hold them at restrictive levels for longer should inflation progress stall.
“At this point, I think the bigger risk would be to begin reducing the funds rate too early,” Mester said. “And with labor markets and economic growth both being very solid, we do not need to take that risk.”
Mester is 65, the mandatory retirement age for reserve bank presidents, and will step down in June.
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