Rate hikes have begun to quell US inflation

WASHINGTON (AP) — Growing evidence that high inflation is finally easing Loretta Mester is a key Fed policymaker. She says that it shows that the Federal Reserve’s aggressive interest rate rises are working as planned. However, further rate hikes will be needed, she said, in order to stop the worst inflation bout for four decades.

“We’re beginning to see the kind of actions that we need to see,” Mester, president of the Federal Reserve Bank of Cleveland, said in an interview with The Associated Press. “Good signs that things are moving in the right direction … That’s important input into how we’re thinking about where policy needs to go.”

Other Fed officials have stated recently that they were encouraged to take more positive readings on inflation, and wages growth. But Mester’s comments are notable because she is among the more consistently hawkish members of the Fed’s 19-person interest-rate-setting committee. (“Hawks” typically support higher rates to fight inflation, while “doves” tend to favor lower rates to boost employment.)

“She has been ahead of the curve on a lot of the arguments that have pushed the Fed to act more hawkishly over the past year,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.

Mester’s views give an indication of how far Fed’s more hawkish policymakers are willing to go in order to control inflation. According to the government, consumer price rises have steadily declined from a peak of 9.1% in June, which was four decades ago. to 6.5% in December.

Yet because the Fed’s own inflation target is much lower — 2% — its policymakers have penciled in further rate increases. Rate hikes that the Fed has already made have led to nearly doubling of mortgage rates, and sharply increased costs for auto loans as well as other consumer and business credit. They have increased the chance of a downturn.

How high the Fed will raise its benchmark short-term rate and how long it keeps it there will likely determine whether it ultimately curbs inflation — and at what price to the economy. The Fed’s rate currently ranges between 4.25% and 4.5%, which is the highest in 15 years.

In her interview Tuesday with the AP, Mester, 64, stressed her belief that more hikes are needed and that the Fed’s key rate should rise a “little bit” above the 5% to 5.25% range that policymakers have collectively projected for the end of this year.

Mester, who has been president of the Cleveland Fed for eight years, didn’t say how large a rate hike she favored when the Fed’s next meeting ends on Feb. 1. Most economists expect the central banks to announce a lower quarter-point increase. But Mester noted that the economy and the financial markets “were able to handle” the half-point hike that the Fed carried out in mid-December.

“We’re not at 5% yet, we’re not above 5%, which I think is going to be needed given where my projections are for the economy,” she said. “I just think we need to keep going, and we’ll discuss at the meeting how much to do.”

Mester’s comments follow remarks from other Fed officials last week that seemed to indicate a likely quarter-point hike at the Feb. 1 meeting. It would be the fourth three-quarter-point increase in rate, and follows a December half-point rate rise.

Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said that quarter-point hikes “will be appropriate going forward.” Two other Fed regional bank presidents — Susan Collins of the Boston Fed and Raphael Bostic of the Atlanta Fed — also said they were leaning toward a quarter-point increase.

Mester acknowledged the fact that Fed’s ever higher rates could lead to more unemployment and layoffs. However, she stated that any increase in joblessness during a normal economic downturn will be much smaller than it would be during a normal upturn.

She said that she hopes that the Fed’s increased rates will mainly reduce the number jobs being posted by employers and not cause mass job cuts. Job vacancies are at historically high levels — a sign that companies are competing for scarce workers. It would indicate that wages will not likely rise as fast if the number of job openings is reduced, which should help to cool inflation.

Wall Street investors indicated that they don’t believe the Fed will raise rates as much as Mester would like. Futures prices indicate that the market believes the central bank will continue to implement quarter-point increases and then cease.

But Mester said she would “need to see inflation moving down faster” before she could support a pause within the next few months.

“We’re starting to see our policy actions do what they’re intended to do,” she said. “But I do believe we have to continue raising … and then hold for a while so that we get back to price stability in a timely way.”