Fed Yet to Reach Sufficiently Restrictive Rates, Mester Says

(Bloomberg) — The Federal Reserve has yet to reach a point where interest rates are sufficiently restrictive, the president of the Cleveland Fed said, suggesting she favors further tightening in US monetary policy. 

“At this point, based on the data I have so far, given how stubborn inflation has been, I can’t say that I’m at a level of the fed funds rate where it’s equally probable that the next move could be an increase or a decrease,” Loretta Mester said in an answer to questions at an event in Dublin Tuesday.  

Mester, who doesn’t vote on monetary policy this year, stopped short of explicitly backing a rate increase at the Fed’s June 13-14 meeting, noting that officials will receive a substantial amount of economic data before their next gathering.

Investors expect the US central bank will hold rates steady next month but begin cutting borrowing costs later in the year, according to pricing in futures contracts.

“There’s four weeks ago before the June meeting. And so I want to take into account all the data, including the banking data,” Mester said. 

Fed officials have delivered five percentage points of interest-rate increases in little over a year, their most aggressive tightening campaign since the 1980s. 

Policymakers raised rates by a quarter percentage point at a meeting earlier this month, bringing their benchmark to a target range of 5% to 5.25%, and signaled they may be ready to pause their tightening cycle.  

Differences Emerging

While officials have been strongly united on the tightening done up until  this point, divisions are beginning to emerge over whether rates are now high enough for the Fed to pause its rate increases. 

Mester’s remarks are among the most hawkish views shared by policymakers since the May meeting, in line with her stance of typically supporting more tightening. Two Fed officials speaking on Monday signaled they favored pausing interest-rate increases, while a third policymaker said the central bank had more work to do to tame inflation. 

“We at the Federal Reserve probably have more work to do on our end to try to bring inflation back down,” Minneapolis Fed President Neel Kashkari said Monday during a moderated discussion in St. Paul, Minnesota. “The labor market is still hot, and we have not seen much softening in the labor market. So, that tells me that we have a long way to go before we get inflation back down,” he said.

But Chicago Fed President Austan Goolsbee told CNBC Monday that it had been a close call whether he dissented against the rate hike policymakers delivered earlier this month, out of concern that officials not over-tighten, though he ultimately voted to go along with it.

“There is still a lot of the impact of the 500 basis points we did in the last year that’s still to come. And you add on that there are tight credit conditions. And I think that we should be extra mindful,” he said. 

Prices climbed 4.9% from a year earlier in April, consumer price index data released last week showed, the first sub-5% reading in two years. While the Fed targets a different yardstick of annual price movements — the personal consumption expenditures index — all measures are running at more than double its 2% target pace.

Policymakers are assessing the economy to gauge how much the recent banking stress, including the failure of a string of regional banks since March, is weighing on growth. Officials have said tighter credit could affect how high they need to lift interest rates to tame inflation.

(Adds comment from other policymakers in 10th paragraph.)

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