Fed Can Downshift From 75 Basis-Point Rate Hikes, Mester Says

(Bloomberg) - Two Federal Reserve officials reinforced expectations the central bank will slow their pace of interest-rate increases next month, even as they stressed the need to keep tightening.

San Francisco Fed President Mary Daly and Cleveland’s Loretta Mester said during separate remarks Monday that inflation remains too high and policymakers have a way to go before completing their tightening campaign. But they both characterized the need for officials to be judicious as they calibrate policy.

“I think we can slow down from the 75 at the next meeting, I don’t have a problem with that,” Mester said during an interview with CNBC television, adding that policy was entering a new “cadence” now that rates have just entered restrictive territory, where they weigh on the economy.

The US central bank lifted interest rates by 75 basis points for the fourth straight time this month, bringing the target on its benchmark rate to a range of 3.75% to 4%. Several Fed officials have signaled they may consider a 50 basis-point increase at their next meeting in mid-December, with the final decision depending on what happens with the economy.

Investors expect the Fed to raise rates by a half-point at the Dec. 13-14 meeting and for the benchmark rate to peak at about 5% next year, according to pricing of contracts in futures markets. Mester said she doesn’t think market expectations are “really off,” adding that more interest-rate increases are needed to bring rates deeper into restrictive territory.

Consumer prices cooled by more than expected in October, a shift that could give Fed officials more room to slow their interest rate hikes. But policymakers say there is noise in the monthly data and they want to see more evidence that inflation is heading down before making a more lasting change to policy.

“I don’t think we’re anywhere near to stopping,” Mester said. “We’re still going to have more work to do because we need to see inflation really on a sustainable downward path back to 2%.”

Speaking earlier in the day, Daly said that officials will need to be mindful of the lags with which monetary policy works, while repeating that she sees interest rates rising to at least 5%.

“As we work to bring policy to a sufficiently restrictive stance -- the level required to bring inflation down and restore price stability -- we will need to be mindful,” she told the Orange County Business Council in Irvine, California. “Adjusting too little will leave inflation too high. Adjusting too much could lead to an unnecessarily painful downturn.”

“I tend to be on the more hawkish side of the distribution, if you will, as I think about what needs to be done here and where the risks lie,” she told reporters on a telephone conference call after the speech. “5% to me is a good starting point,” she said, adding that it could go high if needed.

Fed Chair Jerome Powell said after the Fed’s Nov. 1-2 meeting that officials could end up taking rates higher than previously expected to calm inflation, a sentiment since echoed by several other Fed officials. Officials in September projected rates around 4.4% by the end of this year and 4.6% in 2023, according to their median forecast. They update the quarterly estimates next month.

In her speech, Daly said the Fed’s ongoing reduction of its balance sheet and the forward guidance officials are providing about the future path of policy also work as tightening mechanisms, which is being reflected in financial conditions.

“While the funds rate is between 3.75 and 4%, financial markets are acting like it is around 6%,” she said.

--With assistance from Vince Golle.

By Catarina Saraiva and Jonnelle Marte


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