Cleveland Federal Reserve Chairman Loretta Mester said Wednesday that if economic conditions remain the same when the US central bank meets to decide its next monetary policy move in July, it will advocate raising interest rates by 75 basis points.
The Fed’s monetary tightening path has become a key driver of market activity in recent months as the central bank looks to act aggressively to curb rising inflation, while acknowledging the risk that a sharp rise in interest rates will increase the likelihood of economic recession.
The Fed chose an increase of 75 basis points to its base rate earlier this month, the largest increase since 1994, with inflation peaking at 40 years.
Mester, a voting member of the Federal Open Market Committee, said the July meeting was likely to include a debate among FOMC politicians on whether to choose 50 basis points or 75 basis points.
“If the conditions were exactly as they were today, going to this meeting – if the meeting was today – I would advocate for 75, because I have not seen the numbers on the inflation side that I have to see in order to think that we can let’s go back to a 50 increase, “she told CNBC’s Annette Weisbach.
Mester said he would assess supply and demand conditions in the weeks leading up to the meeting to determine the preferred way to tighten monetary policy.
The “point schedule” of the expectations of individual FOMC members sets the Fed’s base interest rate at 3.4% by the end of the year, from its current target range of 1.5% -1.75%.
“I think reaching the interest rates to those 3-3.5%, it’s really important to do it and do it expeditiously and consistently as we move forward, so after that point I think there’s more uncertainty as to where we will have to go. let’s go to curb inflation, “said Mester.
“Painful transition”
U.S. markets collapsed on Tuesday after a disappointing consumer confidence, which reached 98.7 against the consensus rating of Dow Jones of 100, raising investor concerns about the slowdown in economic growth and the potential complicating effect of aggressive tightening of monetary policy.
Mester suggested that consumers’ experience of inflation, which reached 8.6% at the headline level in May, “blurred” their confidence in the economy.
“At the Fed, we are now on the verge of raising our interest rates to a more normal level and then probably a little higher in restrictive territory, so that we can reduce these levels of inflation so that we can keep the economy going well,” she said.
“The first task for us now is to control the rate of inflation, and I think that’s right now that colors the way consumers feel about the economy and where it’s going.”
Mester acknowledged that there was a risk of recession as the Fed embarked on its tightening policy. However, its main forecast is for growth to be slower this year, below the “trend growth” it sets at 2% as the Fed tries to curb demand and bring it closer to limited supply.
“I expect to see unemployment rise to just over 4% or 4.25% over the next two years, and again these are very good conditions in the labor market,” she said.
“So we are in this transition right now, and I think it’s going to be painful in some ways and it’s going to be an unequal journey in some ways, but it’s very necessary to do that to reduce those inflation figures.”
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