Loretta Mester aims to maintain Fed’s course

The President of The Cleveland Federal Reserve Bank, (known to be a hawk in the FOMC) Loretta Mester aims to maintain Fed’s course, stating that the central bank must continue its gradual approach to raising interest rates as the inflation rate still did not reach the central bank’s 2% inflation target rate. She spoke on Monday in Paris, amid a quiet day of trading.

Speaking to reporters, Mester said that the medium term outlook supported that view of a gradual removal of monetary policy accommodation. She said that this was the best strategy for the central bank to balance the risks for both achieving the policy goals and to avoid any financial stability risks.

Talking about inflation, the Cleveland Fed President was of the view that consumer prices might not pick up sharply over time but added that it was close to the Fed’s symmetric target of 2% inflation rate. As Mester aims to maintain Fed’s course she stated that she expects inflation to reach this target on a sustainable basis over the next one to two years.

“We want to give inflation time to move back to goal… this argues against a steep path,” Mester said. Based on the comments, it is likely that the Fed policy makers will maintain the gradual pace of rate hikes, which is currently projected at three rate hikes this year. Following how inflation stabilizes around the Fed’s 2% inflation target rate, policy makers are expected to project the rate hikes accordingly.

 

The comments also diminish the earlier perception that the Fed could be aggressive in its monetary policy rate hikes when inflation rises above the 2% threshold.

At the previous FOMC meeting in March, the central bank had unanimously decided to hike interest rates by 25 basis points. Officials had back then signaled two more rate hike over the course of the year. However, the market expectations point to three rate hikes during this year and validated by some of the more hawkish members of the FOMC voting committee.

So far, Fed officials have raised interest rates three times last year with the latest rate hike in March putting the Fed’s short term lending rates at 1.50% – 1.75% range.

Recent economic data showed that the Fed’s preferred gauge of inflation, the core PCE price index had inched higher to 1.9% on an annual basis as of March 2018. This brings the inflation rate close to the Fed’s 2% inflation rate which has been undershooting the Fed’s target rate in the recent years.

The Cleveland Fed President, Mester who is a voting member from the FOMC said that the central bank could raise rates at a faster pace especially if the economy accelerated faster than expected. However, she said that the slower pace of inflation increase could potentially offset faster economic growth.

Mester’s comments on Monday were consistent with the Fed’s monetary policy statement released earlier in May. The central bank’s statement emphasized the fact that policymakers do not see the 2% inflation target a ceiling and that officials will not be concerned if inflation overshoots the 2% inflation target rate. This comment managed to soothe investor nerves, who were initially cautious that the Fed could hike rates faster than expected.

Mester aims to maintain Fed’s course and used the opportunity in Paris to reiterate her stance as to whether the central bank should start to analyze its inflation framework for the future. “Now is the time to assess whether changes to our current framework could make monetary policy more effective in achieving our goals,” Mester said at the conference in Paris.

Besides Loretta Mester, there have been a few other central bank members from the FOMC who have called for a review of the central bank’s monetary policy framework involving the inflation rate. However, the Fed President Jerome Powell is yet to acknowledge the idea for such a review.

The next FOMC meeting is scheduled for June 12 – 13^th and the market expectations call for another rate hike which would bring the Fed funds rate to 1.75% – 2.0%.