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Interest rate pivot unlikely before 2024 as inflation rages: Cleveland Fed Chairman

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The Federal Reserve is unlikely to cut its benchmark interest rate until 2024 at the earliest as it seeks to rein in high inflation for decades, Cleveland Fed Chair Loretta Mester said Wednesday.

Mester, a member of the Federal Open Market Committee responsible for pricing, said she expects the Fed to raise interest rates “a little above 4%” by the start of 2023 and maintain this level for some time.

“I don’t expect the Fed to lower the fed funds rate target next year,” Mester added at Wednesday’s event, according to Bloomberg.

Mester’s forecast is the latest indication that the central bank intends to adopt steeper hikes this year, as it aims to prevent rising prices from taking root in the economy. The Fed funds rate is currently set in a range of 2.25% and 2.5%, well below the Mester target level.

Fed Chairman Jerome Powell and other officials have expressed an ironclad commitment to bringing inflation down to the 2% level the central bank deems acceptable, though it’s still unclear for how long. this process will take. Inflation showed signs of slowing but still reached 8.5% in July.

Mester declined to provide details regarding the Fed’s next move at its next policy meeting in September. Powell and others have indicated that the FOMC will have to weigh all available data points before making a decision.

Loretta Mester said fighting inflation should be the Fed’s top priority.
Bloomberg via Getty Images

“The magnitude of rate increases at a particular FOMC meeting and the maximum federal funds rate will depend on the outlook for inflation,” Mester added.

The market is currently pricing in a 68.5% chance of a third consecutive three-quarter percentage point hike at the Fed’s September meeting. A half-percentage-point hike is seen as much less likely, with a probability of just 31.5%, according to data from the CME Group.

Shares fell for three consecutive sessions through Tuesday after Powell made hawkish remarks at an annual summit meeting in Jackson Hole, Wyoming last week. The Fed Chairman’s comment heightened fears that policy tightening could tip the US economy into a prolonged recession.

Jerome Powell
Fed Chairman Jerome Powell recently made hawkish remarks about the policy outlook.
Getty Images

Powell admitted the plan would cause “some pain” for households and likely lead to job losses.

“These are the unfortunate costs of reducing inflation,” Powell said. “But a failure to restore price stability would mean far greater pain.”

Mester played down recession fears during his appearance, noting that strong labor conditions were a sign that the overall economy is still healthy. She expects inflation to fall to 5% or 6% by the end of this year.

At the same time, she acknowledged that an economic slowdown and rising unemployment could come as the Fed forges ahead.

“Even if the economy were to go into recession, we have to reduce inflation,” Mester added.