Loretta Mester, Speech: Rebalancing the U.S. Economy and Monetary Policy

“The Fed’s main policy tool is the federal funds rate. Since March 2020, the FOMC has maintained the target range of the fed funds rate at 0 to 1/4 percent. This January, the Committee announced that it will soon be appropriate to raise the target range. While the Omicron variant may weigh on activity in the near term, the high levels of inflation and the tightness in labor markets make a compelling case to begin recalibrating the stance of monetary policy. Barring an unexpected turn in the economy, I support beginning to remove accommodation by moving the funds rate up in March.”

“What about the future course of monetary policy? It is clear that removing the extraordinary monetary policy accommodation is needed to help rebalance the economy. The last time we began such a process was in December 2015, and it was a very gradual process, with the target range of the fed funds rate reaching 2-1/4 to 2-1/2 percent in December 2018. This time, I anticipate that it will be appropriate to move the funds rate up at a faster pace because inflation is considerably higher and labor markets are much tighter than in 2015. In my view, increases in the fed funds rate in the coming months will be needed, but the ultimate path of the fed funds rate in terms of the number and pace of increases will depend on how the economy evolves. For example, if by mid-year, I assess that inflation is not going to moderate as expected, then I would support removing accommodation at a faster pace over the second half of the year. On the other hand, if inflation moves down faster than expected, then the pace of removal could be slower in the second half of the year than in the first half.”