Cleveland Fed President Loretta Mester said Friday that she still sees the possibility of one more rate hike this year.
The central bank has projected one more rate hike this year and indicated that rates would be held at elevated levels for a while. Mester reiterated Friday that stance was appropriate.
"This is consistent with my own reading of economic conditions, the outlook, and the risks to the outlook," Mester said in a speech in New York.
Mester said she still views inflation risks to the upside, pointing to higher oil prices since July that could seep into core prices and higher gas prices that could make consumers think inflation will be rising again.
"I don’t expect that this is going to move inflation back up to the very high levels we saw last year, but it could stall the progress we have seen over the past few months," said Mester. "The CPI report for September is a reminder that we cannot count on the progress continuing at the same good pace we have seen in recent months."
Mester says whether the Fed’s benchmark policy rate needs to move higher than its current level and for how long it needs to remain restrictive will hinge on how the economy evolves.
While monetary policy is "restrictive," Mester says the resilience the economy has shown in the face of high interest rates has underscored the difficulty of knowing precisely how restrictive policy is partly because of the uncertainty about the level of the so-called neutral real interest rate, or the rate that neither boosts nor pushes down growth adjusting for inflation.
“Regardless of the decision made at our next meeting, if the economy evolves as anticipated, in my view, we are likely near or at a holding point on the funds rate as we accumulate more information on economic and financial developments and assess the effects of the tightening in financial conditions that has already occurred,” she said.
Mester noted that if the increase in longer-term Treasury yields is sustained, that will help to moderate demand and will be one of the factors she’s considering when evaluating whether to raise rates further.
The yield on the 10-year Treasury has risen more than 50 basis points since the Fed’s last policy meeting on Sept. 20, hitting 5% Thursday, the highest level since 2007.
Mester’s comments on yields echo other Fed officials, including Fed Chair Powell, who have said in recent days that if long-term interest rates remain elevated there may be less need for the Fed to act.
Mester’s comments come a day before a 10-day blackout period during which Fed officials are not allowed to make any public statements.
Fed Chair Jerome Powell signaled Thursday the central bank could hold rates steady at its next policy meeting, but also warned that inflation was still too high and that more interest rate increases are still possible if the economy stays surprisingly hot.
Mester says the Fed must manage the risk of raising rates too much with not raising rates enough, balancing bringing inflation down without plunging the economy into a deep recession.
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