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Fed chief says he’s hopeful inflation can be brought down without a recession

by SuperiorInvest

Cleveland Federal Reserve President and CEO Loretta Mester delivers her keynote address at the 2014 Financial Stability Conference in Washington on December 5, 2014.

Gary Cameron | Reuters

Cleveland Federal Reserve President Loretta Mester said on Friday that interest rates will likely need to continue to move higher to bring inflation back to acceptable levels.

In an interview with CNBC, Mester said she sees the central bank’s key interest rate needing to rise above 5% and stay there for a while. The Fed Funds rate, which sets the level banks charge each other for overnight lending but spills over into many forms of consumer debt, is currently in a target range of 4.5% to 4.75%.

“I see that we’re going to have to raise interest rates above 5%,” she told CNBC’s Steve LiesmanSquawk Box“Conversation.” “We’ll find out how much higher.” This will depend on how the economy develops over time. But I think we need to be a little above 5% and stay there for a while to get inflation on a sustainable path down to 2%.

Mester recently made news when she revealed that she was among a small group of Fed officials who for Jan. 31-Feb. 1 of the Federal Open Market Committee, wanted a half-percentage-point increase in rates rather than the quarter-point move the panel approved.

Even though he’s a non-voter on the rate-setting FOMC this year, he gets to make decisions. She said she is not yet sure whether she will push for a half-point increase when the committee meets again in March.

“I don’t prejudge,” she said. “That’s a tactical decision we make in the meeting.

Many economists expect the Fed to be unable to meet its inflation target without plunging the economy into recession. GDP grew by 2.7% in the fourth quarter of 2022 and is around 2.5% in the first quarter of 2023, according to the Atlanta Fed.

Mester said she thinks if the economy shrinks, it won’t be a severe downturn. She also expressed hope that the Fed can achieve its goal without crushing the labor market, which has been surprisingly resilient despite all the rate hikes.

“I think we can have both in this labor market. We can have a healthy labor market and we can return to price stability,” she said. “But I also think it’s really important to know that if we want to maintain healthy labor markets over time, we need to get back to price stability.”

Mester was scheduled to speak at a monetary policy conference in New York later on Friday.

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