Fed’s Mester foresees further tightening to ensure downward trajectory of inflation

Cleveland Federal Reserve President Loretta Mester emphasized the need for further tightening in monetary policy to ensure a “sustained downward trajectory” of inflation. She pointed out that “demand is still outpacing supply in both product and labor markets and inflation remains too high.”

To tackle the persistent inflation, Mester suggested that monetary policy will need to “move somewhat further into restrictive territory”, with fed funds rate “moving above 5%” and “real fed funds rate staying positive for some time”. However, she also acknowledged that the tightening journey is closer to its end than the beginning, with future rate decisions being dependent on the economy’s performance.

Mester expects the unemployment rate to rise to between 4.5% and 4.75% and inflation to ease to 3.75% this year. She projects that inflation will reach the central bank’s 2% target by 2025. In response to an audience question, Mester emphasized the Fed’s aim for a “soft landing” and mentioned that she expects slow growth, well below 1%, in the current economic environment.