On Friday Cleveland Federal Reserve’s President, Loretta Mester, recently hinted at the likelihood of an additional rate hike this year, echoing the central bank’s projections. Addressing an audience in New York, she emphasized the alignment of her views with the current economic indicators and anticipated risks.
Rising oil and gas prices since July have intensified inflation concerns, with Mester noting, “We might not hit last year’s inflation peaks, but we can’t assume the positive trend will persist unchecked.” The recent September CPI report underscores this caution.
The trajectory of the Fed’s primary policy rate will be influenced by evolving economic conditions. While the economy has shown resilience to high-interest rates, Mester recognizes the challenges of accurately gauging the real impact. The fluctuations in the neutral real interest rate further complicate the picture.
A significant development in the financial scene is the rise in long-term Treasury yields, with the 10-year yield hitting a remarkable 5% recently – its highest since 2007. If these levels persist, Mester believes it could moderate demand, becoming a key factor in her rate decisions.
Fed Chair, Jerome Powell, has also weighed in, suggesting that steady high long-term rates might alleviate the need for immediate rate adjustments. However, he hasn’t ruled out more hikes if the economy remains overheated.
Mester’s insights offer a peek into the delicate balancing act the Federal Reserve faces: containing inflation without triggering a severe recession.