Fed’s Mester says data may support June rate cut

New York — Federal Reserve Cleveland president Loretta Mester said on Tuesday she continues to expect the central bank will be able to cut rates in 2024, and noted the June policy meeting might be when the easing kicks off if the data allows it.

“If the economy evolves as expected, then in my view it will be appropriate for the [federal open market committee/FOMC] to begin reducing the fed funds rate later this year, as inflation continues on its downward path towards 2%, and labour markets and economic growth remain solid,” Mester said in a speech given before a gathering held by the National Association for Business Economics, Cleveland Association for Business Economics, and Team NEO.

As for the pace of that action, it could occur “gradually” if the economy meets the forecast, she said.

Mester cautioned that to pave the way for an easing in the stance of monetary policy she needs to see upcoming inflation data meet her forecast of further declines.

Because that could take some time, “I do not expect I will have enough information by the time of the FOMC’s next meeting to make that determination” of an easing in rates. The next Fed policy meeting is scheduled for April 30 and May 1.

But that could change by the time the FOMC meets on June 11-12. “We have to be data dependent so I don’t want to rule that out,” she told reporters after her speech, in regards to an early summer rate cut.

Officials at the last FOMC meeting in March maintained their overnight target rate range at between 5.25% and 5.5% and continued to pencil in three rate cuts this year. Strength in inflation data at the start of the year has called into question when the Fed will kick off rate cuts and how far it will be able to go.

Mester, who will retire at the end of June, is a voting member of the FOMC. She told reporters that three rate cuts for this year remain a “reasonable” forecast while deeming it a “close call”.

In her speech Mester said monetary policy is in a good place right now because a strong economy gives the central bank room to take in data before making a change in rates. She expects continued declines in inflation albeit at a slower pace than last year. She also cautioned against premature rate cuts.

“Moving rates down too soon or too quickly without sufficient evidence to give us confidence that inflation is on a sustainable and timely path back to 2% would risk undoing the progress we have made on inflation,” Mester said, adding “at this point, I think the bigger risk would be to begin reducing the funds rate too early.”

Mester also said in her remarks that she’d revised up her expectation for growth this year to just above 2%, and she said the job market will likely see higher unemployment rates. Mester said she also revised at the FOMC meeting her view of the longer-run federal funds rate to 3% from her prior estimate of 2.5%.

“I don’t think the equilibrium interest rate will be as low as it was” in the future, Mester said following her formal remarks. The current situation plus the outlook suggests that, “although we’ve raised interest rates quite a bit, and they’re at a high level, maybe we don’t have as much restraint on the monetary policy side as we were thinking.”

Reuters