Fed mester sees benchmark rate above 4% and no cuts until at least 2023

Loretta Mester in Jackson Hole, Wyoming

David A. Grogan | CNBC

Cleveland Federal Reserve Chair Loretta Mester said Wednesday she expects interest rates to rise significantly before the central bank can relax its fight against inflation.

Mester, this year’s voting member of the Federal Open Market Committee responsible for setting rates, said she expects benchmark rates to rise above 4% in the coming months. That’s well above the current target range of 2.25% to 2.5% for the federal funds rate, which sets what banks charge each other for overnight borrowing, but is tied to many consumer debt instruments.

Markets are currently pricing in only a 1 in 3 chance that the funds rate will climb above 4% next year.

“My current view is that it will be necessary to raise the fed funds rate to just over 4% by early next year and keep it there,” she said. said in prepared remarks for a speech in Dayton. “I don’t expect the Fed to lower the fed funds rate target next year.”

With that in mind, Mester said rates would stay high “for quite some time,” a phrase used in recent days by Fed Chairman Jerome Powell and New York Fed Chairman John Williams. She said real rates, or the difference between the federal funds rate and inflation, will have to “move into positive territory.”

This year, the Fed has raised rates four times for a total of 2.25 percentage points. Markets are forecasting a third straight increase of 0.75 percentage points at the September meeting and expect rate cuts to begin in the fall of 2023.

Mester said she expects rate increases to slow economic growth, which she sees as “well below 2%” as the unemployment rate rises and financial markets remain volatile. She expects inflation to fall into the 5-6% range this year, then move closer to the Fed’s target in subsequent years.

In a concession to those seeking lower rates, she said she doesn’t think the Fed will necessarily have to keep raising rates until inflation hits the central bank’s 2% target. . But she said policymakers must remain vigilant.

“It would be a mistake to declare victory over the beast of inflation too soon. It would take us back to the world of stop-and-go monetary policy of the 1970s, which was very expensive for households and businesses,” he said. she declared.

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