The U.S. central bank is "just at the beginning" of its monetary tightening cycle and Americans should brace for interest rates to go higher as the Fed battles soaring inflation, Cleveland Fed President Loretta Mester said, while acknowledging the risk of a recession.
'A Little Bit Higher Into Restrictive Territory'In order to quell stubbornly high inflationary pressures, she said the Fed might have to err on the side of tighter financial conditions.
"We’re on a path now to bring our interest rates up to a more normal level and then probably a little bit higher into restrictive territory," she told the outlet.
The FOMC at its June meeting voted to raise rates by 0.75 of a percentage point, the sharpest single boost since 1994, putting the target Federal Funds rate at between 1.5 percent and 1.75 percent.
'There Are Risks of Recession'After being behind the curve of the current inflationary wave, the Fed has moved aggressively to tighten monetary conditions, fueling fears of a recession.
Fed Chair Jerome Powell said recently that the Fed's commitment to bringing down inflation was "unconditional" while acknowledging that the fight against soaring prices could push up unemployment.
While Mester acknowledged in the interview that "there are risks of recession," she said it's not her baseline forecast for the U.S. economy, just for "growth to be slower this year."
“A recession is not my base case right now,” Williams told the outlet. “I think the economy is strong. Clearly financial conditions have tightened and I’m expecting growth to slow this year quite a bit relative to what we had last year.”
Mester said she expects GDP growth this year to come in below 2 percent, while Williams' estimate put the figure at between 1 percent and 1.5 percent.
“But that’s not a recession,” Williams said. “It’s a slowdown that we need to see in the economy to really reduce the inflationary pressures that we have and bring inflation down.”
Billionaire investor and hedge fund manager Bill Ackman echoed Mester's view that the Fed needs to be unwavering in its tightening cycle.
Mester said she expects what she described as a "bumpy ride" toward tighter financial conditions would drive up the unemployment rate from the current 3.6 percent to between 4 percent and 4.25 percent over the next two years.