Arkansas Online

How much to raise the interest rate?

Interviewed by Christopher Rugaber Edited for clarity and length.

With inflation in the United States cooling but still high, the Federal Reserve is facing a high-risk decision: How much further to increase its key short-term interest rate.

Raise it too high, and the Fed risks tipping the economy into a painful recession. But fail to boost the benchmark rate high enough, and inflation could persist longer and become harder to control.

Loretta Mester, who is president of the Federal Reserve Bank of Cleveland and a member of the central bank’s 19-member interest-rate-setting committee, says the biggest risk for the Fed is that it would fail to go far enough in its inflation fight.

In a Jan. 17 interview with The Associated Press, Mester stressed that she favors raising the key short-term rate “a bit” above the collective estimate of the Fed’s policymakers that 5% to 5.25% will end up being its peak level, up from the current 4% to 4.25%.

A full transcript of her comments was published Jan. 18.

In the past two weeks, we’ve had a jobs report that suggests wage growth is slowing. We’ve had an inflation report that showed three months of declining “core” inflation figures. How have these reports affected your outlook on interest rate policy?

It’s very welcome news to see that inflation is starting to come down. That’s important input into how we’re thinking about where interest rate policy needs to go. The way I think about what the most recent monthly numbers are telling us is that we can have more confidence about the inflation projections, which do have inflation moving down this year. My own view is that it’s going to take more policy action to be assured that inflation is on a sustained downward path to 2%. But I do acknowledge that we’ve got some welcome news there.

What does that mean for the next meeting Feb. 1? Would you support a rate hike of a quarter-point — another step down?

How much to raise rates at any one particular meeting is probably less important this year than it was last year where everyone was focused on that. But to my mind, we showed at the December meeting that the economy and the financial markets were able to handle that [one-half percentage point] rate increase. We’re not at 5% yet, we’re not above 5%, which I think is going to be needed given where my projections are for the economy. So I just think we need to keep going, and we’ll discuss at the meeting how much to do at any one particular meeting.

Does the Fed need to see a significant rise in unemployment to bring inflation under control?

The unemployment rate is really extremely low by historical standards. I’m anticipating we’ll see some increase in the unemployment rate, but that it’ll be less than one would typically see in an economic slowdown.

Money & Markets Extra

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2023-01-29T08:00:00.0000000Z

2023-01-29T08:00:00.0000000Z

https://edition.arkansasonline.com/article/284408448248368

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