Loretta Mester, Speech: Inflation, Inflation Expectations, and Monetary Policymaking Strategy

“Reductions in monetary policy accommodation and tighter financial conditions will bring demand into better balance with constrained supply in both product and labor markets, resulting in an economic transition to growth in real output that is well below trend, slower employment growth, and a higher unemployment rate.”

“Since March, the FOMC has raised the target range of the fed funds rate a cumulative 3 percentage points, and in June, the FOMC began to reduce the size of the Fed’s balance sheet according to the plan announced in May.12 While this has been a relatively fast pace of tightening, given the current level of inflation and the outlook, I believe that further increases in our policy rate will be needed. In order to put inflation on a sustained downward trajectory to 2 percent, monetary policy will need to be in a restrictive stance, with real interest rates moving into positive territory and remaining there for some time.”

“We are operating in an uncertain environment, and assessing the balance between supply and demand will remain challenging as we go. In terms of the appropriate policy responses in an environment with a lot of uncertainty, some results in the literature suggest that when policymakers confront more uncertainty either in their data or in their models, they should be more cautious in acting, that is, be more inertial in their responses.14 However, subsequent research has shown that this is not generally true. For example, Sargent (1999) points out that caution does not necessarily mean doing less. When there is uncertainty, it can be better for policymakers to act more aggressively because aggressive and pre-emptive action can prevent the worst-case outcomes from actually coming about.15 Walsh (2003, 2022) points out that better economic outcomes are achieved by assuming that high inflation will be persistent and acting accordingly.”