Loretta Mester, Speech: Returning to Price Stability

“Given current rates of inflation, I believe that the Fed has more work to do in order to get inflation under control. This will entail further rate increases to tighten financial conditions, resulting in an economic transition to below-trend growth in nominal output, slower employment growth, and a higher unemployment rate.”

GDP: “Analysts often use the rule-of-thumb that two consecutive quarters of negative real GDP growth means the economy is in recession. I do not believe the U.S. economy is currently in a recession because the labor market remains very strong. I do acknowledge that the risks of recession over the next year or two have moved up because financial conditions are tightening globally, inflation remains at high levels in many countries, and the devastating war in Ukraine adds considerable uncertainty and downside risks to the growth outlook, especially in Europe. That said, at this point, I have not incorporated a recession into my baseline outlook for the U.S., but instead expect a fairly sharp slowing in activity, especially when compared to the robust growth the U.S. experienced in 2021. While there is considerable uncertainty, I currently expect that the U.S. economy will return to positive growth in the second half of the year, but for this year as a whole and for next year, I expect growth to run well below 2 percent, which is my estimate of trend growth.”

Jobs: “With the economy growing below trend, I expect the current very strong labor market conditions to cool, with the unemployment rate rising somewhat above 4 percent by the end of next year. Some cooling off in the labor market will put it on more sustainable footing compared to the unsustainably tight conditions that exist today.”

Inflation: “I expect inflation to move down into a range of 5 to 6 percent for this year and then to make more progress toward our goal over the next two years, but it will require further action on the part of the Fed to make that so.”

Fed Funds: “The current level of the fed funds rate is near the range of estimates of its longer-run nominal level, and when inflation is at 2 percent and inflation expectations are consistent with 2 percent inflation, this longer-run level would be neutral in the sense of neither stimulating nor restraining economic activity. But in the current high-inflation environment, a 2-1/2 percent nominal funds rate is still accommodative and the Fed has more work to do. My current view is that it will be necessary to move the fed funds rate up to somewhat above 4 percent by early next year and hold it there; I do not anticipate the Fed cutting the fed funds rate target next year.”