Loretta Mester, Speech/Q&A: A Diligent and Judicious Return to Price Stability

Q&A Segment –

Monetary Policy and Fiscal Stability

“I want to keep monetary policy and financial stability apart and use the appropriate tools for each. So, I’m not ignoring financial stability, but I want to be able to use our micro and macro credential tools to focus on that so that we do have the scope to really use our monetary policy tools to focus on our macro stability goals, price stability, maximum employment.”

Fed vs. the Market

“We’re going to do what we have to do with monetary policy to get there and to make sure that inflation is moving down on a sustainable downward path to 2%. So, we take signals from the market obviously, like we look at what the market’s saying and we’re saying, “Okay, they have a different forecast than we do. Why? What are they seeing in the data? What are we seeing in the data?” That’s very important.”

Fed Funds

“I do think we’re going to have to move interest rates up from here a little bit more and then hold it there for some time, real rates restricted for some time so that we’re assured that inflation is back down to 2% … if the economy evolves differently and we can get to (2.0%) inflation faster, our policy path might be different, but my own forecast is that it’s been stubborn, and I expect a little bit more persistence, which means that we’re going to have to keep the funds right up for some time.”

Speech Segment –

Banking System

“The stresses experienced in the banking system in March have eased, but the Fed continues to carefully monitor conditions and is prepared to take further steps as necessary to ensure financial stability.”

GDP and Jobs

“My expectation is that with tighter financial conditions, demand in product and labor markets will continue to moderate. Output growth will likely be well below trend this year and pick up a bit next year. Employment growth will slow, with the unemployment rate rising to 4-1/2 to 4-3/4 percent by the end of the year.”

Inflation & Inflation Expectations

“So far, high inflation has not unanchored medium- and longer-term inflation expectations, which remain at levels reasonably consistent with our 2 percent inflation goal. The continued anchoring of inflation expectations is an important factor underpinning my outlook that we will see a meaningful improvement in inflation this year, with inflation moving down to about 3-3/4 percent this year, continuing to improve next year, and reaching our 2 percent goal in 2025.”

Fed Funds

“Precisely how much higher the federal funds rate will need to go from here and for how long policy will need to remain restrictive will depend on how much inflation and inflation expectations are moving down, and that will depend on how much demand is slowing, supply challenges are being resolved, and price pressures are easing. The FOMC indicated in its March statement that it anticipates that some additional policy firming may be appropriate. In determining the extent of future increases in the target range, the FOMC will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

“Even before the recent stresses, banks had begun to tighten their credit standards. Credit has become less available as interest rates have risen. This is the typical way in which monetary policy tightening transmits to the broader economy. The recent tensions in the banking system could well result in banks further tightening their credit standards, and households and businesses may become more cautious in their spending. Directionally, we know that credit conditions are likely going to be somewhat tighter, and we will be assessing the magnitude and duration of these effects on the economic outlook to help us calibrate the appropriate path of monetary policy going forward.”