It will be necessary to raise the federal funds rate to “somewhat above 4%” by early next year and hold it there, predicted Loretta Mester, president of the Federal Reserve Bank of Cleveland, during a speech today. She added that she does not anticipate cutting the fed funds rate target next year.
The Federal Open Market Committee has raised the rate four times this year and will meet again on Sept. 20-21. In her remarks, Mester said despite a recent slowdown in the rate of inflation, “it is far too soon to conclude that inflation has peaked, let alone that it is on a sustainable downward path to (the Fed target of) 2%.” She anticipated monetary policy needed to move “into a restrictive stance” but shied away from committing to any specific action at the next FOMC meeting.
“While it is clear that the fed funds rate needs to move up from its current level, the size of rate increases at any particular FOMC meeting and the peak fed funds rate will depend on the inflation outlook, which depends on the assessment of how rapidly aggregate demand and supply are coming back into better balance and price pressures are being reduced,” she said.
