Fed's Mester Says More Rate Hikes Needed To Combat Inflation

Federal Reserve Bank of Cleveland President Loretta Mester said Thursday inflation remains too high and noted that she was open to raising rates by more than her colleagues wanted at their last monetary policy meeting.

The Fed "has come an appreciable way in bringing policy from a very accommodative stance to a restrictive one, but I believe we have more work to do," Mester said in a speech text. "At this juncture, the incoming data have not changed my view that we will need to bring the fed funds rate above 5% and hold it there for some time to be sufficiently restrictive to ensure that inflation is on a sustainable path back to 2%," she said.

When the Fed met at the start of the month to deliberate on interest rate policy, it moderated the pace of what had been a torrid barrage of rate hikes and lifted its overnight target rate by quarter percentage point, to between 4.5% and 4.75%. The Fed signaled more rate hikes are coming to help lower overly high inflation levels back to the 2% target.

Mester, who does not have a vote on the Federal Open Market Committee this year, noted she would have been open to a larger rate rise at the gathering. "Setting aside what financial market participants expected us to do, I saw a compelling economic case for a 50-basis-point increase, which would have brought the top of the target range to 5%," she said.

Some other Fed officials have said in recent comments they're ok with smaller rate rises as they proceed toward an uncertain stopping point for the rate rise campaign. But recent data showing that inflation didn't moderate as much as was expected at the start of the year has boosted the prospect the Fed may have to be more aggressive over time.

"It is welcome news to see some moderation in inflation readings since last summer, but the level of inflation matters and it is still too high," Mester said. The January consumer price index data, released earlier this week, "showed a jump in the monthly rate of overall inflation and no improvement in underlying inflation," and it provided "a cautionary tale" for those who believed inflation is moving swiftly back to 2%.

Mester said "I continue to see the risks to the inflation forecast as tilted to the upside for a number of reasons." She also said "the transition back to price stability will take some time and will not be without some pain."

The impact of Fed policy actions "will result in growth well below trend this year and some cooling off in labor markets, with slower employment growth and an increase in the unemployment rate from its very low level," Mester said. This will cool inflation and wage pressures and "as a result, I expect to see good progress on inflation this year," the official said.