The Federal Reserve is unlikely to cut its benchmark interest rate until 2024 at the earliest as it seeks to tame decades-high inflation, Cleveland Fed President Loretta Mester said Wednesday.
Mester, a member of the rate-making Federal Open Market Committee, said she expects the Fed to raise interest rates “somewhat above 4%” by early 2023 and maintain that level for some time.
“I do not anticipate the Fed cutting the fed funds rate target next year,” Mester added at the Wednesday event, according to Bloomberg.
Mester’s guidance is the latest indication that the central bank intends to enact more sharp hikes this year as it aims to prevent higher prices from becoming ingrained in the economy. The Fed’s funds rate is currently set at a range of 2.25% and 2.5%, well below Mester’s target level.
Fed Chair Jerome Powell and other officials have expressed an ironclad commitment to return inflation to the 2% level the central bank deems acceptable, though it’s still unclear how long that process will take. Inflation has shown signs of easing but still hit 8.5% in July.
Mester declined to provide specifics regarding the Fed’s next action at its upcoming policy meeting in September. Powell and others have indicated that the FOMC will need to weigh all available data points before making a decision.
“The size of rate increases at any particular FOMC meeting and the peak fed funds rate will depend on the inflation outlook,” Mester added.
The market is currently pricing in 68.5% probability of a third consecutive three-quarter percentage point hike at the Fed’s September meeting. A half-percentage point hike is seen as far less likely, with just a 31.5% probability, according to CME Group data.
Stocks declined for three straights sessions through Tuesday after Powell delivered hawkish remarks at an annual summit meeting in Jackson Hole, Wyoming last week. The Fed chair’s comment exacerbated fears that policy tightening will tip the US economy into a prolonged recession.
Powell admitted the plan would cause “some pain” for households and likely result in job losses.
“These are the unfortunate costs of reducing inflation,” Powell said. “But a failure to restore price stability would mean far greater pain.”
Mester downplayed recession fears during her appearance, noting strong labor conditions as a sign that the overall economy is still healthy. She expects inflation to fall to 5% or 6% by the end of this year.
At the same time, she acknowledged an economic slowdown and higher unemployment could occur as the Fed continues on its path.
“Even if the economy were to go into a recession, we have to get inflation down,” Mester added.