Cleveland Fed chair sees higher interest rates amid 'stubborn' inflation

By Ovunc Kutlu

ISTANBUL (AA) - The head of the Cleveland Federal Reserve Bank expects higher interest rates from the US central bank to fight "stubborn" inflation.

Loretta Mester said Tuesday that she projects the federal funds rate "moving above 5%" to put inflation on a sustained downward trajectory to meet the Fed's goal of 2% and keep inflation expectations anchored.

The Fed raised its benchmark interest rate by 25 basis points March 22, carrying the target range for the federal funds rate to between 4.75% and 5%.

"Inflation remains too high and too stubborn," Mester said in an address at Money Marketeers of New York University. "The February PCE inflation data showed some improvement, but recall that in January, the data were a bit stronger than analysts expected."

The core personal consumption expenditures (PCE) price index, the Fed's preferred inflation indicator, rose 4.6% annually in February, softening from a 4.7% year-on-year gain in January.

"Precisely how much higher the federal funds rate will need to go from here and for how long policy will need to remain restrictive will depend on how much inflation and inflation expectations are moving down, and that will depend on how much demand is slowing, supply challenges are being resolved, and price pressures are easing," she said.

Regarding the recent US banking crisis, Mester said tensions could cause banks to further tighten their credit standards, while households and businesses may become more cautious about spending.

"Directionally, we know that credit conditions are likely going to be somewhat tighter, and we will be assessing the magnitude and duration of these effects on the economic outlook to help us calibrate the appropriate path of monetary policy going forward," she said.

"Because a safe, sound, and resilient banking system is of first-order importance to our economy, it is vital that we effectively use our microprudential tools of regulation and supervision and our macroprudential tools, including stress tests, to keep the banking system safe, sound, and resilient," she added.