Federal Reserve Bank of Cleveland President Loretta Mester said she’s confident that the U.S. will avoid a recession as the Fed tightens policy, though the inflation rate will probably remain at more than 2% into next year.
“I think that it will take some time to get inflation down,” Mester said on CBS’s “Face the Nation,” citing rising energy and commodity prices. “So I think inflation will remain above 2% this year and even next year, but the trajectory will be that it’ll be moving down.”
China’s attempts to stamp out Covid-19 are also contributing, Mester said. “Certainly the lockdown in China is going to exacerbate the problems that we have in supply chains,” she said. “So that is putting upward pressure on prices.”
Fed officials raised rates by a quarter point last month to a target range of 0.25% to 0.5% and signaled they expect to lift rates to 1.9% by the end of 2022 and 2.8% by the end of next year, according to their median forecast.
Since then, officials have said they are open to moving faster if needed to quell the hottest inflation in four decades, including by hiking by a half-point at their May 3-4 meeting.
Minutes of the Fed’s March meeting showed that many of them had favored going that big last month, but they opted for a more cautious quarter-point hike in light of Russia’s invasion of Ukraine and were open to raising rates by a half point at one or more meetings going forward.
Mester said that while there’s an increased risk of recession, she’s “optimistic that we’ll be able to remove monetary-policy accommodation and maintain good labor-market conditions and the expansion.”
“It’ll be challenging, but we can do it,” she said. With wages failing to keep up with prices for many U.S. families, the Fed will use its policy tools to ensure that inflation doesn’t become “embedded in the economy,” Mester said.
The U.S. consumer price index soared 7.9% in February, the most since 1982. The Fed’s 2% inflation target is based on a separate measure, the personal consumption expenditures price index, which rose 6.4% in the 12 months through February.
The record of the March 15-16 meeting also showed officials had coalesced around a plan to start shrinking their balance sheet at a monthly pace of $95 billion — or more than $1 trillion a year — and could start as early as May.
Officials proposed allowing their asset holdings to run off at a maximum monthly pace of $60 billion in Treasuries and $35 billion in mortgage-backed securities, the minutes showed.
Fed officials say that shrinking the balance sheet will play an important role in tightening the stance of monetary policy and will help reinforce the impact of rate hikes as they confront inflation.
