Fed’s Mester doubts need for impending ‘shock’ rate hikes

Cleveland Federal Reserve Chair Loretta Mester said Friday she favors raising interest rates quickly to bring down inflation, but not so quickly as to disrupt the economic recovery.

That means there’s a strong possibility that a 50 basis point rate hike will be supported at the next Fed meeting and maybe a few more after that, but not to 75 basis points as suggested by St. Louis Fed Chair James Bullard earlier this week. A basis point is 0.01 percentage points.

“My own view is that we don’t need to go there at this point,” Mester said on CNBC’s “Closing Bell” when asked about the 75 basis point move by host Sara Eisen. “I’d rather be more thoughtful and aware of what we’re up to.”

Mester said she would like the Fed to bring its federal funds rate to 2.5% by the end of this year, a rate she and many Fed officials see as “neutral” or neither stimulating nor stifling growth.

The Fed Funds Rate determines which banks charge each other for overnight loans, while also serving as a benchmark for many forms of consumer debt. It is currently range-bound between 0.25% and 0.5% after rising a quarter of a point in March.

“I would support at this point where the economy is up 50 basis points and maybe a few more to get to that 2.5% level by the end of the year,” Mester said. “I think that’s a better way… I prefer that methodical approach rather than a 75 basis point shock [increase]. I don’t think it’s necessary for what we want to achieve with our policy.”

Her comments are consistent with what Chairman Jerome Powell said on Thursday.

Although both officials’ statements were also consistent with recent Fed announcements, they coincided with a fresh round of Wall Street selling in both stocks and bonds.

Mester called the Fed’s policy pivot from historically high levels of accommodation during the pandemic-era “the great monetary policy recalibration.”

“We’re trying to let markets know where we see the economy and why monetary policy needs to deviate from this truly exceptional level of adjustment that was required at the start of the pandemic,” she said.

“Of course, our goal is to do this in a way that supports expansion and healthy labor markets,” Mester added.

According to CME Group’s FedWatch tracker, market prices are currently suggesting the Fed will raise interest rates slightly beyond Mester’s suggestion – possibly to 2.75% after expected hikes of 50, 75, 50, 25, 25 and 25 respectively Basis points with six sessions remaining through the end of the year.

https://www.cnbc.com/2022/04/22/feds-mester-casts-doubt-on-the-need-for-shock-interest-rate-hikes-ahead.html Fed’s Mester doubts need for impending ‘shock’ rate hikes

Chrissy Callahan

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