Senior Fed official sees no ‘compelling’ reason to wait for another rate hike

A senior Federal Reserve official said there was “no compelling” reason to wait before enacting another interest rate hike if economic data showed more needs to be done to bring US inflation under control.

In an interview with the Financial Times, Loretta MasterThe president of the Cleveland Fed, opposed the recent proposals of some politicians who argued that the US central bank should refuse to raise rates at its next meeting in June.

“I really don’t see a good reason to pause — that is, to wait until you have more evidence to decide what to do,” she said. “I would see more convincing arguments in favor of attracting [rates] up . . and then wait a while until you’re less unsure of where the economy is heading.”

agreement this weekend between the White House and Republican Congressional leaders on the U.S. borrowing limit “relief[s] most of the uncertainty is about the economy,” she added. The deal must be approved by both houses of Congress, and the first vote is expected to take place on Wednesday in the House of Representatives.

Mester’s comments come amid disagreement among US policymakers over another rate hike, with some officials hinting at a pause in June and then resuming it later when the economic picture clears up. Meanwhile, others point out that the Fed may not need to tighten policy.

Philip Jefferson, the Fed governor recently appointed by the Biden administration to the position of central bank vice chairman, hinted on Wednesday that he might back a waiver of next month’s hike, stressing that the full effects of the tightening have not yet seeped through the economy. He also warned that higher interest rates could “exacerbate stress” in the banking sector.

“The decision to keep our discount rate unchanged at the next meeting should not be interpreted as meaning that we have reached the peak rate for this cycle,” he said in his speech. “Indeed, skipping the rate hike at the next meeting will allow [Federal Open Market Committee] to see more data before making decisions about the extent of further policy strengthening.”

Mester on Tuesday said the bank will always have to act with some uncertainty about the economic trajectory and said she believes the Fed should only pause when the risks of too little action are balanced by the risks of too much action.

According to Mester, the only reason to skip a rate hike when it is clear that a tightening is needed could be extreme market volatility or some other shock, such as a possible US debt default.

Mester said she could still be affected by incoming employment data due Friday, as well as the next inflation report due just as U.S. central banks convene for a two-day meeting starting on 13 June.

However, Mester, one of the most hawkish regional presidents, has made it clear that she is disappointed with the success in containing price pressures.

“I just think we might have to go further,” she said. “At this point, I don’t see any good reason why we wouldn’t want to take another small step to counter this really entrenched, stubborn inflationary pressure.”

Her comments mark the latest intervention in a tense debate among officials over whether the Fed has squeezed the economy enough to bring down inflation. In a little over a year, he raised the base rate by more than 5 percentage points.

After a series of federal funds rate hikes, the federal funds rate now fluctuates between 5 percent and 5.25 percent. In March, most officials predicted that this level would be the peak of the tightening campaign.

Mester, who won’t become a voting member of the policy-making FOMC until next year, said interest rate decisions will become riskier going forward.

Several voting members of the FOMC have recently expressed their skepticism because of the need for an inevitable pause.

However, Chairman Jay Powell recently hinted that he is maintaining a pause, pointing to the number of Fed rate hikes. He also argued that the recent banking turmoil would tighten financial conditions and, in effect, do some of the central bank’s job for it.

“This is where we get to the really tricky part of how we evaluate trade-offs,” Mester said. “Different politicians will have different views on how they evaluate things.”