Cleveland Fed chair sees interest rate above 4% next year

By Ovunc Kutlu

ANKARA (AA) - The head of the Cleveland Federal Reserve Bank said Wednesday that she expects the Fed's benchmark interest rate to be above 4% next year, adding that she does not foresee any rate cuts through 2023.

"My current view is that it will be necessary to move the Fed funds rate up to somewhat above 4% by early next year and hold it there; I do not anticipate the Fed cutting the fed funds rate target next year," Loretta Mester said at an event at the chamber of commerce for the city of Dayton, Ohio.

If realized, this would be at least 200 basis points of increase in the Fed's interest rate, which currently stands in the target range of 2.25%-2.5%.

To tame the highest inflation in more than 40 years, the Fed has raised its benchmark interest rate by a total of 225 basis points since March – 25 points that month, 50 basis points in May, a surprise 75 points in June, and another 75 points in July.

The probability of another 75 basis points rate hike at the Fed's next meeting on Sept. 20-21 stood at 68.5% as of Wednesday, according to the FedWatch Tool provided by US-based global markets company Chicago Mercantile Exchange (CME) Group.

US consumer inflation peaked at 9.1% in June on annual basis, while producer prices gained 11.3% the same month from the previous year.

"I expect inflation to move down into a range of 5-6% for this year and then to make more progress toward our goal over the next two years, but it will require further action on the part of the Fed to make that so," Mester said.

While many economists believe the Fed's aggressive monetary tightening could lead to recession, the US economy contracted 0.6% in the second quarter of this year, according to the Commerce Department's second reading. The American economy shrank 1.6% in the first quarter.

Mester's comments came a day after New York Fed President John Williams said he expects interest rates to stay high until inflation is pushed down to the central bank's 2% target.

Fed Chair Jerome Powell said Friday that the bank will use its tools "forcefully" to tame inflation and that this will cause "some pain" for the American economy, especially households and businesses.

"This is no place to stop or pause ... Failure to restore price stability would mean far greater pain," Powell told the annual Jackson Hole, Wyoming conference.