Federal Reserve Bank of Cleveland President Loretta Mester said she saw a compelling case for rolling out another 50 basis-point interest-rate hike earlier this month and the U.S. central bank has to be prepared to move higher if inflation remains stubbornly high.
"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," Mester said Thursday in remarks prepared for an event organized by the Global Interdependence Center and the University of South Florida Sarasota-Manatee.
"Indeed, at our meeting two weeks ago, 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.
Fed officials voted unanimously to lift the benchmark lending rate at the start of February by a quarter of a percentage point, raising it to a range of 4.5% to 4.75%. That followed a half percentage-point increase at their December meeting, which came after four consecutive jumbo-sized 75 basis-point hikes.
While Mester participates in deliberations, she does not vote on monetary policy decisions this year.
The Fed could accelerate the pace of rate increases again if economic conditions warrant, Mester said in a question-and-answer session following her remarks.
"It's not always going to be, you know, 25," she said, referring to basis points. "As we showed, when the economy calls for it, we can move faster, and we can do bigger at any particular meeting. And it's going to be driven by how the economy is evolving."
Asked when she might be comfortable with the Fed pausing rate increases, the Cleveland Fed president said Fed officials are still working toward raising rates to a level that's high enough to bring inflation down to their target.
"Nothing right now is leading me to think that I need to really be focused on that question at this point," Mester said on a call with reporters following the event. "My focus really is on 'let's make sure that we have policy in that sufficiently restrictive stance, so that inflation is moving down sustainably to 2%.'"
In her prepared remarks, Mester said, inflation risks remain tilted to the upside because of the war between Russia and Ukraine, which adds more uncertainty for food and energy prices. China's reopening could also increase demand for commodities, she said.
Mester, one of the more hawkish Fed officials, said those upside risks support the case for "overshooting" on policy. "Over-tightening also has costs, but if inflation begins to move down faster than anticipated, we can react appropriately," she said.
Officials in December penciled in a peak interest rate of 5.1% this year, based on the median forecast, implying two more quarter-point increases. Several policymakers said Tuesday that interest rates may need to move to a higher level than anticipated to ensure inflation continues to ease. Mester echoed that sentiment on Thursday.
"Given the risks and costs, we need to be prepared to move the federal funds rate higher if the upside risks to inflation are realized and inflation fails to moderate as expected or if the imbalances between demand and supply in product and labor markets persist longer than anticipated," she said.
Data released Tuesday showed consumer prices climbed 6.4% in January from a year earlier, higher than economists expected and still far above the Fed's goal for 2% annual inflation, which is based on a separate measure.
Mester said she expects economic growth to come in "well below trend" this year, but she hasn't penciled a recession into her forecast for 2023.
