Inflation is likely to moderate later this year but if readings stay strong, the Federal Reserve might have to raise interest rates at a faster pace, said Cleveland Fed President Loretta Mester on Wednesday.
Mester, who is a voting member of the Fed’s interest-rate committee this year, said she will support an interest rate hike at next policy meeting on March 16, barring an unexpected turn in the economy, in a virtual address to the European Economics and Financial Centre in London.
What happens after March?
Fed policy is too easy at the moment, in light of the outlook for economic growth and inflation, she said.
The last time the Fed began to remove monetary accommodation in 2015, it was a very gradual process, with the Fed’s policy rate only reaching 2.3% in December 2018.
“This time, I anticipate that it will be appropriate to move the funds rate up at a faster pace because inflation is considerably higher and labor markets are much tighter than in 2015,” Mester said.
The exact pace will depends on how the economy evolves.
If by mid-year, it looks like inflation is not going to moderate as expected, “then I would support removing accommodation at a faster pace over the second half of the year,” she said.
“On the other hand, if inflation moves down faster than expected, then the pace of removal could be slower in the second half of the year than in the first half,” she added.
It is also appropriate to shrink the Fed’s balance sheet sooner and at a faster pace than during the last tightening cycle in 2017-2018, she said.
The Cleveland Fed president said she would support outright sales of some of the $2.5 trillion in mortgage-backed securities on the Fed’s balance sheet.
While policy transitions are often met with some volatility in financial markets, and come with challenges and risks, “my expectations are that these transactions will be successful, inflation will come under control, and the economic expansion will be sustained,” Mester said.
U.S. stocks DJIA, +0.73% SPX, +1.24% were higher on Wednesday, continuing to retrace some of their losses of January when fears of higher interest rates dominated trading. The yield on the 10-year Treasury note TMUBMUSD10Y, 1.925% slipped to 1.92% after reaching close to 2% on Tuesday, the highest level since 2019.