Loretta Mester, Speech: An Update on the Economy and Monetary Policy

“The FOMC raised its policy rate by 25 basis points at its March meeting and by another 50 basis points at its May meeting, and the Committee indicated that it believes ongoing rate increases will be appropriate. In addition, yesterday the Fed began reducing the size of its balance sheet according to the plan announced in May. Reducing the amount of the Fed’s securities holdings will help to lessen downward pressure on longer-term interest rates by returning duration to the market. The reduction will be done primarily by adjusting the reinvestment amounts of the principal payments the Fed receives on its assets. Without asset sales, the process could take three years or so.”

“With the interest rate moves we have made so far, the current target range of the federal funds rate is 75 to 100 basis points. This is well below the range of estimates of the longer-run nominal policy rate that would be neutral in the sense of neither stimulating nor restraining economic activity when inflation is 2 percent. For example, in the March Summary of Economic Projections of FOMC participants, the range of estimates of the longer-run fed funds rate was 2 to 3 percent. My own estimate is 2-1/2 percent. If inflation were 2 percent, with longer-term inflation expectations anchored at levels consistent with the 2 percent goal, this would imply a neutral real fed funds rate of 1/2 percent. But in the current high inflation environment, the real fed funds rate remains very negative. So given economic conditions, ongoing increases in the fed funds rate are called for. Unless there are some big surprises, I expect it to be appropriate to raise the policy rate another 50 basis points at each of our next two meetings.”