The Federal Reserve needs to raise interest rates further because inflation is now expected to be above the Fed’s target for four years, Cleveland Fed President Loretta Mester said Monday.
“In order to ensure that inflation is on a sustainable and timely path back to 2%, my view is that the funds rate will need to move up somewhat further from its current level and then hold there for a while as we accumulate more inflation on how the economy is evolving,” Mester said in a speech at the University of California San Diego.
The Cleveland Fed president said that “a slightly higher policy rate” would get the benchmark rate up to a level where the next move could either be a rate hike or a rate cut.
“This would be a good holding point as we accumulate more inflation about whether the economy is evolving as expected,” she added.
The big picture view is that the U.S. economy has shown more underlying strength than anticipated earlier this year and inflation has remained stubbornly high, “with progress on core inflation stalling,” Mester said.
In June, the Fed held its policy rate steady at a range of 5%-5.25%.
Most economists expect the Fed to raise its benchmark rate by 25 basis points to a range of 5.25%-5.5% after its meeting in two weeks.
Mester noted that the Fed’s own forecast, released last month, now shows that the median projection of Fed officials now expects inflation to remain slightly above 2% at the end of 2025. That means inflation will have been above the Fed’s 2% target for more than four years.
A more timely path back to 2% inflation is desirable because otherwise households and businesses may come to expect high inflation, and this makes it harder to bring inflation down, she said.
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