Fed boss says tighter policy needed to cool prices

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(Bloomberg) – Cleveland Federal Reserve Chair Loretta Mester said officials must keep raising interest rates and can’t be complacent as they work to fight the most high inflation for a generation.

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“Given the current level of inflation, its broad-based nature and its persistence, I believe monetary policy will need to become tighter in order to put inflation on a sustainable downward path to 2%,” Mester said in Tuesday’s remarks prepared for an event with the Economic Club of New York.

She said U.S. central bankers need to weigh the risk of tightening too much against not tightening enough, but “at this point the biggest risks come from tightening too little and inflation persisting very high and its rootedness in the economy”.

Fed officials are rapidly raising interest rates as they strive to quell inflation that is near the highest level in four decades. Policymakers appear poised for their fourth consecutive 75 basis point hike when they meet early next month.

Median projections released by the US central bank on September 21 showed officials see their benchmark rate rising to 4.4% by the end of this year and 4.6% by the end of the month. next year, up from the current target range of 3% at 3.25. %.

Mester, who votes in monetary policy decisions this year, reiterated that she sees rates rising slightly above the median projection as she expects inflation to be more persistent.

A strong jobs report in September showed that the US labor market remains resilient, with the unemployment rate dropping to 3.5%, matching a five-decade low. Officials will also review new inflation data released on October 13.

The Cleveland Fed chief said she expects inflation to fall “significantly” next year to around 3.5% and hit the central bank’s 2% target in 2025. The path to lower inflation will require below-trend economic growth, weaker job gains, and could include greater financial volatility.

But despite the uncertainty, Mester said officials needed to take decisive action to bring prices under control.

“Being careful doesn’t mean doing less,” she said. “Instead, it means being very careful not to allow wishful thinking to substitute for convincing evidence, leading to prematurely declaring victory over inflation and pausing or reversing rate hikes too soon. “

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