Fed Should Maintain Interest Rates Above 5% to Curb Inflation, Says Federal Reserve Official

In the midst of a banking crisis, the Federal Reserve (Fed) has increased interest rates by 25 basis points last month, maintaining its hawkish stance on monetary policy. This move has pushed the policy benchmark range from 4.75% to 5%.

Loretta Mester, the president of the Federal Reserve Bank of Cleveland, has now called for a further interest rate hike. She suggested that policymakers should push the federal funds rate above 5% this year and keep it there for a while to curb inflation.

Loretta Mester

During a recent event, Mester stated that to bring inflation down to 2%, monetary policy needs to move a bit further into restrictive territory this year, with the Fed’s fund rate needing to rise above 5%. Despite the ongoing banking crisis, Mester was comfortable with the recent interest rate hike by Fed officials, stating that “it seems to have stabilized at this point.”

Furthermore, she indicated that she did not expect policymakers to cut interest rates in 2023. Mester noted that “Exactly how much the federal funds rate will need to rise from here and how long policy will need to remain restrictive will depend on how much inflation and inflation expectations are coming down, how much demand is slowing, how supply bottlenecks are being resolved, and how much pressure on prices is easing.”

Mester’s comments suggest that she expects a “meaningful” adjustment in inflation soon. Inflation in the US has been gradually declining in recent months. The Consumer Price Index (CPI) decreased to 7.1% in November last year, lower than expected. It continued to decline to 6.5% in December, 6.4% in January, and 6% in February this year.

The Fed’s hawkish stance on monetary policy is aimed at keeping inflation in check by increasing interest rates to slow down the economy’s growth. Higher interest rates lead to reduced borrowing and spending, ultimately curbing inflation. However, it can also lead to slower economic growth and higher unemployment.

The Fed’s decision to hike interest rates amid the ongoing banking crisis indicates its commitment to keeping inflation in check, even in challenging times. Mester’s call for further rate hikes and a longer restrictive policy suggests the Fed’s focus on curbing inflation remains strong.

It remains to be seen how the economy and inflation will respond to the Fed’s monetary policy. As the US and the world continue to grapple with the COVID-19 pandemic, the Fed’s monetary policy decisions will be closely watched by policymakers, economists, and the public alike.

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