Mester Says March Hike Appropriate, Barring Unexpected Turn

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Mester Says March Hike Appropriate, Barring Unexpected Turn

February 25, 2022

  • Says Ukraine impact will be monetary policy consideration
  • Geopolitical events add upside risk to inflation: Mester

Federal Reserve Bank of Cleveland President Loretta Mester said that barring an “unexpected turn in the economy,” she still supports kicking off a series of interest-rate hikes in March, and starting to reduce the size of the central bank’s balance sheet soon.

“There are risks and uncertainty around the outlook, including those engendered by the geopolitical events unfolding today,” Mester said in prepared remarks for an event Thursday hosted by Lyons Companies and the University of Delaware. Asked after the speech how the Ukraine crisis will affect policy decisions, Mester said, “I don’t think it changes the need of the Fed to remove accommodation from the emergency levels” it currently has.

Mester’s remarks come after Russia’s launch of a full-scale invasion of its neighbor Ukraine, a move that’s roiled financial markets and sent energy costs soaring. The biggest security crisis in Europe since World War II threatens to add to challenges for policy makers already beset by the fastest inflation in decades alongside labor shortages.

“Geopolitical events add upside risk to the inflation forecast even as they put some downside risk to the near-term growth forecast,” Mester said. “The implications of the unfolding situation in Ukraine for the medium-run economic outlook in the U.S. will also be a consideration in determining the appropriate pace at which to remove accommodation.”

Mester said she would support a faster pace of tightening if inflation doesn’t come down as expected by mid-year. But if price increases move down quicker than expected, the removal of policy accommodation “could be slower in the second half of the year than in the first half,” she said.

Mester reiterated that she supports both reducing the balance sheet at a faster pace than last time and selling some of the Fed’s holdings of mortgage-backed securities at some point during the process.

Asked whether the Fed had lost credibility by holding off on raising rates even as inflation surged, Mester said that will be something for financial markets to decide. She highlighted that long-run expectations for consumer-price gains are still “well anchored around 2%” — the Fed’s target.