Fed’s Cleveland president sees more US rate rises ahead

WASHINGTON - Federal Reserve Bank of Cleveland president Loretta Mester said on Tuesday that the US Federal Reserve likely has more interest rate rises ahead amid signs that the banking sector’s recent troubles have been contained.

To keep inflation on a sustained downward path to 2 per cent and keep inflation expectations anchored, she sees monetary policy moving “somewhat further into restrictive territory this year, with the Fed funds rate moving above 5 per cent and the real Fed funds rate staying in positive territory for some time”.

“Precisely how much higher the federal funds rate will need to go from here and for how long policy will need to remain restrictive will depend on how much inflation and inflation expectations are moving down, and that will depend on how much demand is slowing, supply challenges are being resolved, and price pressures are easing,” Ms Mester said in a speech before a group of economists.

The Fed in late March raised rates by a quarter percentage point to between 4.75 per cent and 5 per cent. The decision was haunted by banking sector troubles that led policymakers to say a tightening in financial conditions would likely weigh on economic activity.

In remarks following her speech, Ms Mester said she was very comfortable moving ahead with the rate rise, given that the authorities had taken steps to manage risks coming from the banking sector troubles.

At the policy meeting, officials also pencilled in a single additional rate rise for 2023, as the Fed continues to boost the cost of short-term borrowing in a bid to lower inflation.

In her remarks, Ms Mester, who does not have a vote on the policy-setting Federal Open Market Committee (FOMC) in 2023, said: “My forecast is similar to the modal forecasts of FOMC participants released two weeks ago, although I see somewhat more persistent inflation pressures than the median forecast among participants.”

She also pushed back on market views that the Fed will need to cut rates much sooner than central bankers currently expect.

“Can I come up with scenarios that would have the Fed cutting rates? Yes. Is it my modal forecast? No,” she said.

She expressed confidence that the banking sector’s woes should ultimately prove contained.

“The US banking system is sound and resilient,” she said.

“The stresses experienced in the banking system in March have eased, but the Fed continues to carefully monitor conditions and is prepared to take further steps as necessary to ensure financial stability.”

In her remarks, Ms Mester said that she expects growth and hiring to slow and inflation pressures to ease.

There should be a “meaningful improvement” in inflation with price pressures easing from their current 5 per cent year-over-year increase to 3.75 per cent in 2023 and 2 per cent by 2025, she said.

Growth should slow to below-trend levels in 2023 before ticking up in 2024, she added.

Unemployment, now at 3.6 per cent, should rise to between 4.5 per cent and 4.75 per cent by the close of 2023, she said. REUTERS