Loretta Mester, Interview: WSJ Print

Monetary Policy Lags

“I’ve heard some people say the lags have shortened. I don’t think there’s anything definitive that we can point to because, remember, there wasn’t anything definitive about exactly what the lag was.”

Inflation

“It’s always a risk management exercise. There’s not going to be like, “Oh, we know that stopping now is the right answer.” It’s going to be, “Let’s look at the risks.” I’m waiting for that balance of risk to be there right now. I still think the risks on the inflation side are on the upside. And I also think the cost of having inflation remain too high is costly in the short run because households have to deal with that.”

:Well, I don’t want to prejudge the committee discussion and we’re going to have that conversation around the table. But you’re right, and my view of the economy hasn’t changed that much in terms of we do have inflation pressures that I think are um pretty “in there.” We haven’t seen the kind of sustained downward pressure. I’m very gratified that inflation rates have come down since last summer. But I think we have more work to do and certainly that’s something that I’m very focused on. And I still think that the risks are to the upside on inflation, not to the downside.”

Fed Funds

“It certainly would not be appropriate to keep raising interest rates until inflation gets back down to 2%. But we have to have more assurance that we’re on that downward path. and that’s going to mean at, as we saw in the last [Federal Open Market Committee] meeting, we do have to continue to move the rate up some more. And then pause for a time to assess things. And hopefully we’ll get that confirming evidence that inflation’s moving back down.?”

25bps or 50bps

“I guess my feeling at the last meeting was that I came into that meeting thinking—I had the view that we have got to get at least to a 5% [federal-funds rate], and I said above 5%. We weren’t there yet, right? And a 50 [basis point increase] last meeting would’ve gotten the top of the target range to 5%. Why would you not do that? Especially when we had done a 50 [in December.] It wasn’t like now. This is a different situation now. We’ve already reduced it to 25 [basis points]. That’s going to be part of the consideration.”

Terminal Rate

Question: What was your terminal rate projection in December?  Mester: “I was above 5%.”