Fed Mester signals need for further rate hike, foresees no impending recession

In a speech delivered today, Cleveland Fed President Loretta Mester expressed surprise at the resilience shown by the economy which, in her words, “has shown more underlying strength than anticipated earlier this year.” However, Mester also raised concerns regarding the stubbornly high inflation rates, noting that “progress on core inflation [has been] stalling.”

“In order to ensure that inflation is on a sustainable and timely path back to 2%,” she said, “my view is that the funds rate will need to move up somewhat further from its current level and then hold there for a while as we accumulate more information on how the economy is evolving.”

Mester also touched on labor market’s imbalance during reopening, where she noted that “labor demand well outpaced labor supply, putting upward pressure on wages and price inflation.” Although she sees progress in achieving a more balanced situation, she cautioned that “it is slow progress and demand is still outpacing supply.”

Despite these challenges, Mester revealed a streak of optimism in the business community. She said that most business leaders “think there won’t be a recession this year, and many think that, even if demand slows down some more, a recession will be avoided or will be very mild.”