Hot dog sausages are seen in a supermarket as inflation continues to hit consumers, with annual CPI rising 8.3% over the 12 months ended April in Los Angeles, California, United States, May 27, 2022. REUTERS/Lucy Nicholson
Sign up now for FREE unlimited access to Reuters.com
June 2 (Reuters) – The Federal Reserve must hike rates by half a percentage point at each of its next two meetings and then assess whether inflation has eased enough to slow the pace of rate hikes, or whether it needs to raising them further, Loretta Mester, president of the Cleveland Federal Reserve Bank, said Thursday.
And while that process could be “painful” for households and businesses, she said, it would be worse if inflation — now at a 40-year high and more than three times the Fed’s 2 percent target — continued to sap purchasing power would weaken and undermine economic momentum.
“Financial markets could remain very volatile if financial conditions tighten further; growth could slow a little more than expected for a few quarters; and the unemployment rate could temporarily rise above estimates of its longer-term level,” Mester said in a prepared-for-delivery note to the Philadelphia Council for Business Economics. “It will be painful, but so is high inflation.”
Sign up now for FREE unlimited access to Reuters.com
Fed policymakers have hiked interest rates to a range of 0.75% to 1% this year and starting this month trimmed their nearly $9 trillion balance sheet to put further upward pressure on borrowing costs.
Most Fed policymakers, like Mester, are in favor of another full percentage point hike during the next two Fed meetings in June and July.
The outlook for September and beyond is less certain and at least one policymaker, Atlanta Fed President Raphael Bostic, said he could envision pausing monetary tightening at this point to take stock of the economy and not to overshoot.
However, Mester’s comments and those of Vice Chair Lael Brainard early Thursday suggest the poll will be more on the pace of rate hikes than whether or not to go ahead with them.
Indeed, critics say the central bank has moved too slowly, warning that steeper rate hikes will be needed to slow price pressures, which would likely plunge the US economy into recession.
Mester said she doesn’t see the current situation as forcing the Fed to sacrifice a strong job market to bring down inflation.
However, she made it clear that she takes the latest polls showing rising inflation expectations as a serious concern and she is not convinced that inflation has peaked.
“The risk of a recession has risen, but with underlying aggregate demand and demand for labor so strong, a good argument can still be made that a sharp slowdown with a slowdown in growth can be avoided if supply and demand balance better Equilibrium is coming to a trend pace this year, labor market conditions remain healthy and inflation is hovering in the 4-1/2 to 5-1/2 percent range this year and falling further next year,” Mester said.
Sign up now for FREE unlimited access to Reuters.com
Reporting by Ann Saphir Editing by Chizu Nomiyama
Our standards: The Thomson Reuters Trust Principles.
Comments are closed.