Cleveland Fed President Loretta Mester said in a speech Thursday morning she would have favored raising interest rates by 0.50% earlier this month, saying the Fed still has more work to do to bring down inflation.
"The FOMC has come an appreciable way in bringing policy from a very accommodative stance to a restrictive one, but I believe we have more work to do," Mester said at a Global Interdependence Center conference at the University of South Florida Sarasota-Manatee College of Business.
"Indeed, at our meeting two weeks ago, setting aside what financial market participants expected us to do, I saw a compelling economic case for a 50-basis-point increase, which would have brought the top of the target range to 5 percent," Mester said.
In its Feb. 1 policy decision, the Fed raised the target range for benchmark interest rates by another 0.25%, setting the range at 4.5%-4.75%, the highest since 2007.
Mester said she wouldn't predict action for the next meeting, but that generally speaking, she does not like to surprise markets and takes that into account when setting policy.
"I don’t want to surprise the markets," Mester said. "We're better if we explain. In that meeting there was an economic case for [a 50 basis point increase] in my view, but the market wasn't expecting that. That does factor into my views about the proper thing to do at a meeting."
"I don’t think it's wise to surprise the markets," Mester added.
The Fed's forecasts as of December called for rates to a peak range of 5%-5.25% and remain there until the central bank is convinced inflation is coming down.
"The incoming data have not changed my view that we will need to bring the fed funds rate above 5 percent and hold it there for some time to be sufficiently restrictive to ensure that inflation is on a sustainable path back to 2 percent," Mester said.
Mester said exactly how much more the Fed needs to raise rates is contingent on how much inflation and inflation expectations are moving down, which will depend on how much demand is slowing, supply challenges are being resolved, and price pressures are easing. She is not focused on pausing at the moment, but rather on getting rates into restrictive territory.
Mester said while she welcomed a cooling in inflation readings since last summer, inflation remains too high. She noted January’s consumer price index showed a jump in the monthly rate of overall inflation and no improvement in underlying inflation.
"The report provides a cautionary tale against concluding too soon that inflation is on a timely and sustained path back to 2 percent," said Mester.
Mester sees an upside risk to inflation from the war in Ukraine, which she said could still continue to push up food and energy prices and influence short-term inflation expectations. Mester also remains cautious that China's economic re-opening, which could increase demand for commodities and push energy prices and thus overall inflation higher.
Mester expects economic growth will clock in well below average and says it wouldn’t take much to push the economy into recession.
"It wouldn’t take much of a negative shock to push growth into negative territory for a time," said Mester. "Most of our business contacts are preparing for a mild recession."
Mester is bracing for the risk of a longer-than-expected inflation fight, noting the Fed’s forecast for inflation to come down to 2% by 2025 could turn out to be overly optimistic. Mester pointed to research from the Cleveland Fed that inflation could end up being much more persistent than current projections.
"Given the risks and costs, we need to be prepared to move the federal funds rate higher if the upside risks to inflation are realized and inflation fails to moderate as expected or if the imbalances between demand and supply in product and labor markets persist longer than anticipated,” she said.
Mester said the costs of prematurely loosening policy still outweigh the costs of overshooting.
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