Cleveland Federal Reserve Bank President Loretta Mester said Wednesday that if economic conditions remain the same when the U.S. central bank meets to decide its next monetary policy move in July, she will advocate for a rise of 75 basis points in interest rates.
The Fed’s path of monetary tightening has become a key driver of market activity in recent months, as the central bank tries to act aggressively to curb rising inflation, while acknowledging the risk that a sharper rise in interest rates will increase the likelihood of an economic downturn.
The Fed opted for a 75 basis point rise in its benchmark rate earlier this month, the largest increase since 1994, with inflation at a 40-year high.
Mester, a voting member of the Federal Open Market Committee, said the July meeting is likely to involve a debate among FOMC policymakers on whether to opt for 50 basis points or 75 basis points.
“If the conditions were exactly as they were today to enter this meeting, if the meeting were today, I would defend 75 because I haven’t seen the kind of numbers on the inflation side that I need to see to think. That we can go back to an increase of 50, ”he told CNBC’s Annette Weisbach.
Mester said he will make an assessment of supply and demand conditions over the next few weeks before the meeting to determine the preferred way to tighten monetary policy.
The “dot chart” of individual FOMC members’ expectations places the Fed’s benchmark rate at 3.4% at the end of the year, from its current target range of 1.5% -1. 75%.
“I think getting interest rates up to this 3-3.5%, it’s very important that we do it, and we do it quickly and consistently as we move forward, so it’s after that point where I think there’s more uncertainty about how far we will have to go to curb inflation, “Mester said.
“Painful transition”
U.S. markets fell on Tuesday after a disappointing reading of consumer confidence, which stood at 98.7 against a Dow Jones consensus estimate of 100, raising investor concern about the slowdown in the economic growth and the potential aggravating effect of an aggressive tightening of monetary policy.
Mester suggested that the consumer experience with inflation, which reached 8.6% at the headline level in May, was “clouding” their confidence in the economy.
“At the Fed, we’re on track to bring our interest rates to a more normal level and then probably a little higher in restrictive territory, so that we can lower those inflation rates and be able to maintain a good economy in the future, ”he said.
“The first job for us right now is to control inflation rates, and I think right now that’s marking how consumers feel about the economy and where it’s going.”
Mester acknowledged that there is a risk of recession as the Fed embarks on its tightening policy. However, its benchmark forecast is for growth to be slower this year, below “trend growth”, which stands at 2%, as the Fed tries to moderate demand and bring it closer to restricted supply. .
“I expect to see unemployment rates rise over the next two years to just over 4% or 4.25%, and again, these are very good labor market conditions,” he said.
“So now we’re in this transition, and I think it’s going to be painful in some ways and it’s going to be a bumpy trip in some ways, but it’s very necessary that we do that to reduce those inflation numbers.”