Waiting for the Other Shoe To Drop on Interest Rate Increases

Addressing the issue of inflation, Loretta Mester, President of the Cleveland Federal Reserve Bank, suggested that the path forward likely involves one more interest-rate increase followed by a period of stability, according to Reuters. She indicated that her previous stance on potential rate cuts beginning in late 2024 might need revision.

In an interview during a Federal Reserve conference in Jackson Hole, Wyoming, Mester expressed the importance of avoiding an overly restrictive policy that could trigger economic downturns. Her aim, she told Reuters, is to guide policy in a way that aligns with the Federal Reserve’s target of 2% inflation by the close of 2025.

“Our intention is to prevent a further drift,” Mester emphasized. She highlighted that not only do rapid price hikes place a burden on American citizens, but allowing inflation to persist also renders the economy susceptible to future uncertainties.

Mester pointed out that extended periods of inflation above 2% result in a sustained elevation of price levels, negatively impacting households. “This is why timeliness is of utmost importance to me,” she asserted.

In June, a consensus emerged among most Federal Reserve policymakers, including Mester, that halting rate hikes around the 5.5%-5.75% range—just a quarter-point above the current rate—could be feasible. Additionally, they anticipated initiating rate cuts in the coming year to prevent an excessive tightening of the economy as inflation subsides.

However, Mester acknowledged that her projections from June, which included rate cuts in the latter part of 2024, could undergo revision. This adjustment would be influenced by the pace at which inflation recedes.

Assessing the economic landscape, Mester noted that the strong economic growth has surpassed expectations, and the labor market remains tight. She maintained that the Federal Reserve’s implemented rate hikes have played a role in tempering this robustness.

Despite a decline from last year’s peak of 7%, where inflation stood at 3%, Mester expressed caution about assuming a swift return to the 2% target. She underscored her reluctance to prematurely ease policy measures.

Projections submitted by the Federal Reserve in June indicated a median forecast of 2.1% inflation by the conclusion of 2025. Mester’s personal projection aligned with the target of 2% inflation. The upcoming September forecasts are expected to offer insights into the outlook through 2026.

As Mester refines her September projections, she indicated that achieving 2% inflation by 2025 is a flexible goal, not a rigid constraint. If adjusting the timeline would protect the economy from undue strain, she expressed willingness to consider such a course.

However, Mester conveyed her current belief that such a situation is unlikely. She expressed confidence that with the current state of affairs and inflation trends, achieving 2% inflation by 2025 can be accomplished without detrimental effects on the real economy.

“My approach to policy calibration is geared towards restoring the 2% inflation timeframe,” Mester stated. While she didn’t firmly tie the next rate hike to September, she suggested it would likely occur within the year.

A native Houstonian, Michael graduated from Texas A&M University with a Bachelor’s degree in accounting and a Master’s degree in finance. Grounded in the principles of his training as a CPA and CFP® and with nearly 20 years’ experience, Michael designs forward-thinking, taxefficient investment strategies for retirees and specializes in complex situations unique to high-net worth families.

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