Cleveland Fed President Mester Cautious Despite Lower Inflation, Calls for Further Evidence

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Cleveland Federal Reserve President Loretta Mester expressed scepticism about the central bank’s triumph over rising inflation, despite this week’s reports indicating a decline in inflation rates. Mester emphasized the need for more concrete evidence before declaring victory in the battle against higher prices.

“We’re making progress on inflation, discernible progress. We need to see more of that,” Mester stated during the interview. “We’re going to have to see much more evidence that inflation is on that timely path back to 2%. But we do have really good evidence that it has made progress, and now it’s just, is it continuing?”

The Labor Department’s separate reports revealed that consumer prices remained unchanged in October from the previous month, with wholesale prices actually falling by 0.5%. While the producer price index fell below the Fed’s 2% 12-month inflation goal, the consumer price index remained at 3.2%, rising even higher when excluding food and energy, reaching 4%.

Following these reports, the futures market saw a complete elimination of the possibility of the Fed approving any additional interest rate hikes. In fact, market pricing is now indicating the equivalent of four quarter percentage point rate cuts for the upcoming year, according to a CME Group gauge. However, Mester remains reserved about predicting the next move for policymakers.

“I haven’t assessed that yet. Where I think we are right now is we’re basically in a very good spot for policy,” Mester stated.

Drawing an analogy between the Fed’s position and navigating a ship, Mester likened it to being in the crow’s nest. “We’re at the crow’s nest. What does the crow’s nest let you do? It lets you look out on the horizon and see where the data is coming in, and where the economy is evolving. And then we’ll have to see: Is it moving in the way that we forecasted?”

Despite having a vote on the committee in 2024, Mester, who will retire in midyear after meeting the Fed’s time-served limit, has not yet decided on the direction she believes interest rates should take.

“My feeling is that it’s really not about cutting rates. It’s really about how long we stay in a restrictive stance and perhaps have to go higher given what happens in the economy,” she concluded.