Fed’s Mester Says Interest Rates Are at or Near the ‘Holding Point’

Federal Reserve Bank of Cleveland President Loretta Mester said the US central bank is close to wrapping up its aggressive tightening campaign, but signaled she still favors raising rates once more this year based on how the economy evolves.

(Bloomberg) — Federal Reserve Bank of Cleveland President Loretta Mester said the US central bank is close to wrapping up its aggressive tightening campaign, but signaled she still favors raising rates once more this year based on how the economy evolves.

“Regardless of the decision made at our next meeting, if the economy evolves as anticipated, in my view, we are likely near or at a holding point on the funds rate,” Mester said Friday at an event organized by the Manhattan Institute. 

Fed Chair Jerome Powell on Thursday suggested the US central bank is inclined to hold interest rates steady again at its next meeting, but he left the door open to the possibility of a future hike if policymakers see further signs of resilient economic growth. 

Officials held their rate in a range of 5.25% to 5.5% last month. Their forecasts showed 12 of 19 policymakers wanted one more hike this year and the median projection showed that fewer rate cuts expected next year than what was forecast in June.

Inflation Risks

Mester, who doesn’t vote on policy decisions this year, said inflation-forecast risks remain tilted to the upside and that the September projections were “consistent” with her reading of the economy and the outlook.  

“From my forecast I would say we’re within one of the peak, then we can hold it there for a while,” she said in a question session after her speech.

The September report on consumer prices, which showed they are still running at a brisk pace, is a reminder that the Fed “cannot count on the progress continuing at the same good pace we have seen in recent months,” Mester said. 

“It is important to guard against becoming complacent if it takes longer and longer to achieve the Fed’s 2% goal,” she said. 

Mester also reiterated that the recent rise in long-term Treasury yields could affect the Fed’s future rate decisions if they persist. “As one of the financial conditions we monitor, it will be one of the factors I consider when evaluating the appropriate path of monetary policy going forward,” Mester said. 

Mester added the increase may be driven by higher growth expectations, an acceptance that rates are likely to remain elevated for longer and investors demanding greater compensation.

The Cleveland Fed chief earlier this month voiced support for a possible rate hike in November. She did not explicitly back that timing on Friday. 

The Fed has been shrinking its balance sheet at a pace of a maximum $95 billion a month to return it to pre-pandemic levels. It still has $7.9 trillion of assets — down from a record $8.97 trillion in April last year. 

“We still have a very large balance sheet,” and the runoff can take another 2 to 2 1/2 years, Mester said. “It’s going to take a while to get it down.”

(Updates with comment from Mester in final paragraph.)

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