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Fed’s Mester Signals Support for Another Hike But Urges Prudence

Fed’s Mester Signals Support for Another Hike But Urges Prudence

(Bloomberg) — Federal Reserve Bank of Cleveland President Loretta Mester signaled support for another interest-rate hike to quell inflation while flagging the need to watch recent bank stress that could crimp credit and dampen the economy.

“I anticipate that monetary policy will need to move somewhat further into restrictive territory this year, with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time,” Mester said Thursday in remarks prepared for an event hosted at the University of Akron in Ohio. 

“Precisely how much higher the federal funds rate will need to go from here and for how long policy will need to remain restrictive will depend on economic and financial developments,” said Mester, a usually hawkish voice who doesn’t vote on rates this year.

Fed officials raised interest rates over the past year in effort to tame inflation running well above the central bank’s 2% target. Policymakers lifted borrowing costs by a quarter point last month, bringing the target on their benchmark rate to a range of 4.75% to 5%.

They are expected to move by the same amount again at their upcoming May 2-3 meeting. Some Fed officials have said they’d like to pause at that point, though investors are pricing rate cuts by the end of the year.

“We are much closer to the end of the tightening journey than the beginning, and how much further tightening is needed will depend on economic and financial developments and progress on our monetary policy goals,” Mester said. 

The failure of Silicon Valley Bank last month and the resulting market turmoil forced the Fed and other regulators to take emergency action to shore up confidence by providing the wider banking sector with liquidity.

Mester joined other Fed officials in saying the stress could cause banks to tighten access to credit, which could slow spending and growth. 

“This would work in the same direction as tighter monetary policy,” Mester said Thursday. “So we will need to continue to assess the magnitude and duration of these effects on credit conditions to help us calibrate the appropriate path of monetary policy going forward. This is the prudent thing to do.”

Answering questions after her speech, Mester said she expects low growth of below 1% this year. But while a shock could easily turn growth negative, Mester said she is not expecting a deep recession and expressed confidence officials might still achieve a soft landing. 

“The economy has been very resilient and the labor market has been very strong,” Mester said. “So my anticipation would be that even if that were to happen, it wouldn’t be sharp downturn.” 

(Updates with fresh Mester comment in 10th, 11th paragraphs)

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