Loretta Mester, the President of the Federal Reserve Bank of Cleveland, expressed her outlook on Tuesday regarding potential rate cuts by the central bank this year. Speaking at an event hosted by various economic associations, Mester indicated that she still anticipates the possibility of rate cuts, possibly commencing as early as the June policy meeting, if economic indicators align with expectations.
Mester emphasized that if the economy progresses as predicted, it would be suitable for the Federal Open Market Committee (FOMC) to initiate rate reductions later this year. She highlighted the importance of inflation trending towards the target of 2% and the maintenance of robust labor markets and economic growth for such a decision.
The pace of these rate adjustments, Mester suggested, would likely be gradual, contingent upon economic developments meeting forecasts. However, she cautioned that confirmation from forthcoming inflation data matching projections would be necessary before making any decisions on easing monetary policy. Acknowledging the upcoming FOMC meeting scheduled for April 30 and May 1, Mester stated that it might be premature to determine a rate cut at that time.
Yet, she acknowledged the possibility of reassessing the situation by the June 11-12 meeting, stressing the importance of remaining data-dependent. Currently, the FOMC maintains its target rate range set between 5.25% and 5.5%, with expectations of three rate cuts this year. However, uncertainties persist regarding the timing and extent of these cuts, particularly in light of recent inflation data indicating strength at the beginning of the year.
Mester, who is set to retire at the end of June, holds a voting position on the FOMC. She affirmed that projecting three rate cuts for the year remains a plausible forecast but described it as a finely balanced decision. In her address, Mester characterized the current state of monetary policy as favorable due to a resilient economy, allowing for ample data assessment prior to any rate adjustments.
Regarding inflation, Mester anticipates continued declines, albeit at a slower pace compared to previous years. She cautioned against premature rate reductions, emphasizing the need for sufficient evidence to ensure a sustainable return of inflation to the 2% target. Mester also revised her growth projection for the year slightly upward, expecting growth to surpass 2%. Additionally, she anticipates an increase in unemployment rates.
In light of these factors, Mester adjusted her long-term estimate of the federal funds rate to 3%, reflecting her belief that future equilibrium interest rates may not be as low as previously thought. Despite recent rate hikes, Mester hinted that there might still be room for maneuvering on the monetary policy front, given the current economic landscape and outlook.