Cleveland Federal Reserve Bank President Loretta Mester said Tuesday that she still expects the central bank to be able to cut rates this year and noted that the June policy meeting could be when the easing begins if the data allows.
“If the economy develops as expected, then I think it will be appropriate for the (Federal Open Market Committee) to start cutting the fed funds rate later this year, as inflation continues on its downward path to 2%, and labor markets and economic growth remain solid,” said Mester in a speech before a meeting held by the National Association for Business Economics, Cleveland Association for Business Economics and Team NEO.
As for the pace of that action, it could happen “gradually” if the economy meets the forecast, she said.
Mester warned that to pave the way for an easing of the stance of monetary policy, she needs to see that upcoming inflation data meet her forecast of further declines.
Because that could take some time, “I don’t expect to have enough information until the next FOMC meeting to make that determination” on easing rates. The Fed’s next policy meeting is scheduled for April 30 and May 1
But that could change when the FOMC meets on June 11-12. “We have to rely on data, so I don’t want to rule that out,” she told reporters after her speech, referring to an early summer tax.
Officials at the last FOMC meeting in March kept their overnight target range between 5.25% and 5.5% and continued to pencil in three rates this year. Strength in inflation data at the start of the year cast doubt on when the Fed will start raising rates and how far it can go.
Mester, who will retire at the end of June, is currently a voting member of the FOMC. She told reporters that three rates for this year remains a “reasonable” forecast while she thinks it’s a “close call.”
In her speech Mester said that monetary policy is in a good place now because a strong economy gives the central bank room to take data before making a change in rates. She expects continued declines in inflation albeit at a slower pace than last year. She also warned against premature tariffs.
“Moving rates down too early or too quickly without sufficient evidence to give us confidence that inflation is on a sustainable and timely path back to 2% would risk undoing the progress we’ve made on inflation,” Mester said, adding “at this point, I think the bigger risk would be to start cutting the rate too early.”
Mester also said in her remarks that she revised her expectation for growth this year to just above 2%, and she said the labor market is likely to see higher unemployment rates. Mester said she also revised at the FOMC meeting her view on the longer-term federal funds rate to 3% from her previous estimate of 2.5%.
“I don’t think the equilibrium interest rate will be as low as it has been” in the future, Mester said after his formal remarks. The current situation plus the outlook suggests that “although we have raised interest rates quite a bit, and they are at a high level, maybe we don’t have as much moderation on the monetary policy side as we thought.”