Fed's Mester Says Hot Inflation Data Affirms Case For More Rate Hikes

Federal Reserve Bank of Cleveland leader Loretta Mester said Friday she wasn't surprised by the latest round of strong U.S. inflation data, which she saw as another reminder the central bank still needs to raise rates further to reduce the pressures that are pushing prices higher.

The government inflation report "is another indication that the impulse of inflation and price pressures is still with us. It's going to take more effort on the part of the Fed to get inflation on that sustainable downward path to 2%," Mester said in an interview with Reuters on the sidelines of a conference in New York, held by the University of Chicago Booth School of Business.

Mester spoke in the wake of the release of government data on incomes, spending and price pressures. As part of that report, the January personal consumption expenditures price index rose by a larger-than-expected 5.4% versus the same month a year ago, higher than December's 5.3% year-over-year increase. Prices stripped of food and energy costs also increased at a higher rate than in December.

The report challenged the narrative of many on Wall Street and endorsed by some at the Fed that price pressures were finally turning the corner and inflation was moving more swiftly back to target after hitting multi-decade highs. The report reignited a debate over whether the Fed, having decelerated the pace of rate rises at its most recent meeting, may again have to implement larger rate increases, or lift rates further over time, to get inflation under control.

"We just need to see all those prices coming back down and we haven't seen that sustainably yet," Mester said.

The Fed veteran noted in recent remarks that she had favored a 50 basis point increase at the last Fed meeting, in opposition to her colleague's support of 25 basis points. Mester does not have a vote on this year's rate-setting Federal Open Market Committee meetings due to annual rotation of regional Fed leaders on that panel.

In the interview, Mester said she was still unwilling to offer a forecast of what she will call for at the next meeting.

"I still think that this focus on 50 [basis points] versus 25 [basis points] at a meeting kind of misses the bigger picture, which is, there are inflationary pressures in the economy, the level of inflation is still too high, and it's going to take more on the monetary policy side to get inflation down," Mester said.

Reiterating that she had already expected to see slower improvement in inflation relative to her colleagues, Mester said her view on the economy and the outlook was little changed from December, when Fed officials last offered formal forecasts on key economic indicators and the rate outlook.

Since Mester called for a 50 basis point hike, jobs data has been very robust and inflation has been stronger than expected, suggesting her case for larger action remains in place. But Mester countered there's more data and anecdotal information from local businesses to take on board before debating rate rise sizes at the next FOMC meeting, which is scheduled for March 21-22.

Mester reiterated in the interview that she still believes the federal funds rate, now at between 4.5% and 4.75%, needs to get above 5% and stay there to bring inflation down.