Fed chief sees benchmark interest rate above 4% and no cuts at least until 2023

Cleveland Federal Reserve President Loretta Mester said Wednesday that she sees interest rates rising significantly before the central bank can ease its fight against inflation.

Meester, this year’s voting member of the Federal Open Market Committee that sets rates, said she sees rates rising above 4% in the coming months. This is well above the current target range of 2.25%-2.5% for the federal funds rate, which determines what banks charge each other for overnight borrowing but is tied to many consumer debt instruments.

“My current view is that it will be necessary to raise the fed funds rate to just over 4 per cent by early next year and keep it at that,” she said in prepared remarks to a speech in Dayton. “I don’t expect the Fed to lower the federal funds rate target next year.”

In line with that, Meester said rates will remain high “for some time,” a phrase the two have used in recent days. Federal Reserve Chairman Jerome Powell And the Federal Reserve Bank of New York President John Williams. She said real rates, or the difference between the federal funds rate and inflation, would need to “move into positive territory.”

The Fed has raised interest rates four times this year for a total of 2.25 percentage points. Markets are pricing in a third straight increase of 0.75 percentage points at the September meeting and are looking to start interest rate cuts in the fall of 2023.

Meester said she expects rate increases to slow economic growth, which she views as “well below 2%” while the unemployment rate rises and financial markets remain volatile. It expects inflation to fall to a range of 5% to 6% this year and then come closer to the Fed’s target in subsequent years.

In one concession to those looking for lower rates, she said she doesn’t think the Fed will necessarily keep raising interest rates until inflation hits the central bank’s 2% target. But she said policymakers must remain vigilant.

“It would be a mistake to declare victory over the inflation monster too soon,” she said. “Doing so would take us back to the deadlocked world of monetary policy in the 1970s, which was very costly for households and businesses.”