The Bottom Line:
- Inflation has eased substantially from a peak of 7% to 2.7%, but is still too high according to Fed Chair Jerome Powell.
- Loretta Mester, retiring Cleveland Fed President, welcomes the recent inflation data but emphasizes the need for continued progress.
- The Fed’s monetary policy has been restrictive, affecting housing markets, growth rates, and the balance between supply and demand in the labor market.
- Mester believes it would be inappropriate to keep rates at current levels until inflation reaches the 2% target, and the Fed remains data-dependent in assessing the trajectory of inflation and labor markets.
- To consider lowering the degree of restrictiveness, Mester would like to see a few more months of good inflation data and short-run inflation expectations moving down, while calibrating policy to bring inflation down sustainably without negatively impacting unemployment.
Fed Chair Powell: Inflation Easing but Still Too High
Progress in Curbing Inflation
Federal Reserve Chair Jerome Powell acknowledged that while inflation has eased substantially from its peak of 7% to 2.7%, it still remains too high. The central bank has made considerable progress towards its dual mandate of maximum employment and stable prices over the past two years, with the labor market coming into better balance and continued strong job gains alongside a low unemployment rate.
The Fed’s Stance on Interest Rates
Loretta Mester, President of the Federal Reserve Bank of Cleveland, emphasized that the Fed has been working hard to bring inflation down through restrictive monetary policy. While welcoming the recent positive inflation data, Mester cautioned that the battle isn’t over until the target inflation rate of 2% is achieved. She stated that it would be inappropriate to keep interest rates at current levels until inflation reaches the desired level.
Assessing the Path Forward
Mester highlighted the importance of being data-dependent when setting monetary policy. The Fed closely monitors the trajectory of inflation and labor markets to calibrate its approach. While the recent inflation readings have been encouraging, Mester believes that a few more months of consistent data, along with a decline in short-run inflation expectations, would be necessary before considering any potential rate cuts. The central bank aims to strike a balance between bringing inflation down sustainably while keeping an eye on unemployment levels.
Mester Welcomes Inflation Data, Emphasizes Need for Continued Progress
Mester Welcomes Inflation Data, Emphasizes Need for Continued Progress
Loretta Mester, President of the Federal Reserve Bank of Cleveland, expressed optimism regarding the recent inflation reports, stating that they were “welcome news” and “great news” considering it was her last FOMC meeting before her tenure ends. Mester acknowledged the Fed’s efforts to combat inflation through restrictive monetary policy, noting that while significant progress has been made over the past couple of years, the central bank hasn’t reached its target yet. She emphasized the importance of looking at the entire set of data and being pleased with the downward trend in inflation after a brief stall earlier in the year.
Assessing the Sufficiency of Restrictive Measures
When asked whether the Fed is sufficiently restrictive in its approach, Mester highlighted the visible effects of the central bank’s policies on the economy, such as the impact on housing markets, growth rates, and the balance between supply and demand in the labor market. However, she stressed the need for a data-dependent approach to determine if the current level of restrictiveness is adequate. Mester stated that it would be inappropriate to maintain rates at their current levels until inflation reaches the 2% target. Instead, the Fed aims to assess the trajectory of inflation and make policy decisions accordingly.
Navigating the Path to Sustainable Inflation
Mester emphasized the importance of confidence in the Fed’s ability to guide inflation towards a sustainable path to 2%. She noted that while estimates of the neutral rate may vary, the central bank must continually assess the degree of restrictiveness based on the evolution of the economy. Mester indicated that she would prefer to see a few more months of positive inflation data, along with a decline in short-run inflation expectations, before considering any potential rate cuts. The Fed’s goal is to calibrate its policy to achieve a sustainable downward path for inflation while closely monitoring the labor market and unemployment levels.
Restrictive Monetary Policy Impacts Housing, Growth, and Labor Markets
Restrictive Monetary Policy Impacts Housing, Growth, and Labor Markets
Loretta Mester, President of the Federal Reserve Bank of Cleveland, acknowledged that the Fed’s restrictive monetary policy is visibly affecting the economy. The impact can be seen in housing markets, growth rates, and the balance between supply and demand in the labor market. However, Mester emphasized the need for a data-dependent approach to determine if the current level of restrictiveness is sufficient. She stated that it would be inappropriate to maintain rates at their current levels until inflation reaches the 2% target, and the Fed must continually assess the trajectory of inflation to make informed policy decisions.
Assessing the Neutral Rate and Policy Calibration
Mester noted that estimates of the neutral rate may vary, and the central bank must constantly evaluate the degree of restrictiveness based on the evolution of the economy. In the Summary of Economic Projections, Mester raised her long-run nominal fed funds rate to 3%, recognizing that higher rates may be the neutral rate going forward due to various economic trends. She emphasized that the Fed’s policy should be calibrated to bring inflation down sustainably while closely monitoring unemployment levels and the labor market.
Data-Dependent Approach and Confidence in Inflation Trajectory
Mester stressed the importance of a data-dependent approach in determining the appropriate timing for potential rate cuts. She indicated that she would prefer to see a few more months of positive inflation data, along with a decline in short-run inflation expectations, before considering any changes to the current policy stance. The Fed’s goal is to achieve a sustainable downward path for inflation while carefully balancing the risks around the economic outlook. Mester highlighted the need for confidence in the Fed’s ability to guide inflation towards the 2% target, emphasizing that the central bank must avoid waiting too long to adjust rates if inflation consistently moves downward.
Mester: Inappropriate to Maintain Rates Until 2% Inflation Target Reached
Maintaining Rates Until 2% Inflation Target Reached Deemed Inappropriate
Loretta Mester, President of the Federal Reserve Bank of Cleveland, emphasized that it would be inappropriate for the central bank to keep interest rates at their current levels until inflation reaches the 2% target. Instead, the Fed must assess the trajectory of inflation and make policy decisions accordingly. Mester highlighted the need for a data-dependent approach, considering factors such as the evolution of the economy, the balance between supply and demand in the labor market, and the degree of restrictiveness in monetary policy.
Confidence in Sustainable Inflation Path Crucial for Policy Calibration
Mester stressed the importance of having confidence in the Fed’s ability to guide inflation towards a sustainable path to 2%. She noted that while estimates of the neutral rate may vary, the central bank must continually evaluate the degree of restrictiveness based on the economy’s progress. Mester indicated that she would prefer to see a few more months of positive inflation data, along with a decline in short-run inflation expectations, before considering any potential rate cuts. The Fed’s goal is to calibrate its policy to achieve a sustainable downward path for inflation while closely monitoring the labor market and unemployment levels.
Balancing Inflation Reduction and Economic Risks
The Federal Reserve aims to strike a delicate balance between bringing inflation down sustainably and navigating the risks surrounding the economic outlook. Mester cautioned against waiting too long to adjust rates if inflation consistently moves downward, as maintaining the current level of restrictiveness for an extended period could lead to the policy becoming increasingly restrictive. The central bank must carefully consider the timing of potential rate cuts based on a comprehensive assessment of inflation data, labor market conditions, and the overall economic landscape.
Data-Dependent Approach to Calibrate Policy for Sustainable Inflation Reduction
Assessing Inflation Trajectory and Policy Calibration
Loretta Mester, President of the Federal Reserve Bank of Cleveland, emphasized the importance of a data-dependent approach in setting monetary policy. The Fed closely monitors the trajectory of inflation and labor markets to calibrate its approach. Mester stated that while the recent inflation readings have been encouraging, a few more months of consistent data, along with a decline in short-run inflation expectations, would be necessary before considering any potential rate cuts. The central bank aims to strike a balance between bringing inflation down sustainably while keeping an eye on unemployment levels.
Balancing Restrictiveness and Economic Evolution
Mester highlighted that the Fed must continually assess the degree of restrictiveness based on the evolution of the economy. She noted that estimates of the neutral rate may vary, and the central bank’s policy should be calibrated to bring inflation down sustainably while closely monitoring the labor market. Mester cautioned against waiting too long to adjust rates if inflation consistently moves downward, as maintaining the current level of restrictiveness for an extended period could lead to the policy becoming increasingly restrictive.
Confidence in Guiding Inflation to Sustainable Path
Mester stressed the importance of having confidence in the Fed’s ability to guide inflation towards a sustainable path to 2%. She indicated that it would be inappropriate to maintain rates at their current levels until inflation reaches the target. Instead, the Fed must assess the risks around the economic outlook and make informed policy decisions based on a comprehensive assessment of inflation data, labor market conditions, and the overall economic landscape. The central bank’s goal is to achieve a sustainable downward path for inflation while carefully navigating the challenges posed by the evolving economic environment.
