Loretta Mester, Speech: A Diligent Return to Price Stability

Fed Funds

“We have moved rates up expeditiously this year, starting from a very accommodative stance to a stance that is becoming restrictive. The focus had been on how quickly we could get to that restrictive stance. Now the focus can shift to the appropriate level of restrictiveness that will return the economy to price stability in a timely way. Given the current level of inflation, its broad-based nature, and its persistence, I believe monetary policy will need to become more restrictive and remain restrictive for a while in order to put inflation on a sustainable downward path to 2 percent.”

“Precisely how much higher the fed funds rate will need to go and for how long policy will need to remain restrictive will depend on how much inflation and inflation expectations are moving down, which depends on how much demand is slowing, supply challenges are being resolved, and price pressures are easing. To help me make the assessment of how high and how long, I will be looking at a variety of incoming information and data, including the official statistics, survey evidence, and reports from our business, labor market, and community contacts, which are more forward looking than other data sources.”

Volatility, Growth & Jobs

“The transition back to price stability will take some time and will not be without some pain. It is likely that there will continue to be higher-than-normal levels of financial market volatility, which can be difficult to navigate. With growth likely to be well below trend, it could easily turn negative for a time. Business contacts tell us that given how hard it has been to attract and retain workers over the last two years, they intend to keep their workers even as the economy slows. If so, we could see less of an increase in the unemployment rate than is typical in an economic slowdown. However, it is also possible that the unemployment rate could go up more than anticipated and this would impose difficulties on households and businesses.”

Overtightening

“As is always the case when we are transitioning monetary policy, we will need to continue to weigh the risks of tightening too much against the risks of tightening too little. Tightening too much would slow the economy more than necessary and entail higher costs than needed. Tightening too little would allow high inflation to persist, with short- and long-run consequences, and necessitate a much more costly journey back to price stability. We will need to be very diligent in setting monetary policy to return the economy to price stability and be judicious in balancing these risks so as to minimize the pain of the journey.”

“Despite the moves we have made so far, given that inflation has consistently proven to be more persistent than expected and there are significant costs of continued high inflation, I currently view the larger risks as coming from tightening too little.”