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Fed’s Mester Urges Caution: Avoid Hasty Interest Rate Cuts

  • Cleveland Federal Reserve President Loretta Mester cautions against premature rate cuts
  • Reducing interest rates too quickly could reverse progress in reducing inflation
  • Mester expects three quarter-point rate cuts this year
  • Inflation fell to a 2.6% annual rate in December, down from 5.4% a year ago
  • Mester emphasizes the need for sufficient evidence of sustainable inflation before rate cuts

Introduction

In a speech to the Ohio Bankers League meeting, Cleveland Federal Reserve President Loretta Mester warned against cutting interest rates too soon, highlighting the risk it poses to inflation reduction progress. Mester emphasized the need for sufficient evidence that inflation is on a sustainable path before considering rate cuts. She believes premature rate cuts would undermine the efforts made to achieve the current inflation rate.

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Rate Cut Expectations

Mester stated that she expects three quarter-point rate cuts to take place this year, bringing the Fed’s benchmark rate to a range of 4.5%-4.75%. However, she does not provide a specific date for the first cut and highlights the importance of not rushing the decision.

Risk to Inflation Reduction

Mester emphasizes the risk of moving rates down too soon or too quickly without sufficient evidence of sustainable inflation. She believes that such a move could undermine the progress made in reducing inflation and potentially lead to a reversal in interest-rate policy.

Inflation Trends

Inflation, as measured by the Fed’s preferred personal-consumption expenditure price index, fell to a 2.6% annual rate in December, down from 5.4% in the same month one year ago. While this indicates progress in reducing inflation, Mester cautions against assuming that last year’s rapid improvement will continue as price levels approach the Fed’s 2% target.

Economic Outlook

Mester expects economic growth to moderate this year and for inflation to come down. She anticipates household spending to moderate as well, but notes that consumers are becoming more price-sensitive. Mester also highlights the potential impact of supply-side factors, such as supply chain improvements and the availability of workers, on economic growth.

Conclusion

Cleveland Federal Reserve President Loretta Mester warns against cutting interest rates too soon and too quickly without sufficient evidence of sustainable inflation. She believes that premature rate cuts could reverse progress in reducing inflation and undermine the work done so far. As a voting member of the Fed’s interest-rate committee, Mester’s cautious approach underscores the need for careful consideration and evaluation before making any decisions regarding interest rates.

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