Beating Inflation: A Strategic Path Forward

Cleveland Federal Reserve Bank’s Loretta Mester believes that in order to overcome inflation, an additional U.S. interest-rate hike is necessary, followed by a period of stability. However, she now contemplates revising her prior stance of potential rate cuts in late 2024.

While her intention is not to tighten policy to the extent of impeding economic stability, Mester emphasized the importance of setting policies that would steer inflation towards the Federal Reserve’s target of 2% by the end of 2025.

“We must avoid letting inflation drift further away,” Mester asserted during an interview with Reuters at the Fed’s conference in Jackson Hole, Wyoming.

As of June, Mester, alongside several other Fed policymakers, believed that once the policy rate reaches the range of 5.5%-5.75%, they would likely cease raising interest rates. This range represents a quarter percentage point increase from the current level.

In addition, they anticipated a need to reduce interest rates next year to prevent unnecessary constraints on the economy as inflation subsides.

Mester revealed that when formulating fresh forecasts ahead of the September rate-setting meeting, she may need to reevaluate her previous expectation of rate cuts in the latter half of 2024. This reassessment will be heavily influenced by the rapidity of the decline in inflation.

Although Mester’s participation as a voting member of the policy-setting Federal Open Market Committee will not occur until 2024, she remains actively engaged in shaping future decisions.

With economic growth surpassing expectations and a tight labor market, Mester believes that the rate hikes implemented thus far by the Fed will effectively moderate the strength in both areas.

Previous projections submitted in June indicate a median forecast of 2.1% inflation by the end of 2025. The forthcoming September projections will provide insights into their expectations for the year 2026.

While Mester did not specifically mention September as the definitive month for the next and potentially final rate hike, she does anticipate it occurring within this year.