Loretta Mester, Speech: Returning to Price Stability, In It to Win It

Jobs

“The imbalance between labor demand and supply will need to continue to shrink to alleviate wage pressures. Since there is little reason to think that labor force participation will increase significantly in the coming months, labor demand will need to moderate further to reduce the imbalance. I expect that with the economy growing well below trend, the labor market will cool off, with slower employment growth and a rise in the unemployment rate. But this moderation in labor demand could come mainly from firms deciding not to add to their payrolls rather than cutting their staffs. Indeed, many contacts have told me they plan to do all they can to retain workers through the slowdown, given how hard hiring has been over the past couple of years. This suggests we will see less of an increase in the unemployment rate than is typical in an economic slowdown.”

Inflation

“My expectation is that we will see a meaningful improvement in inflation this year and further improvement over the following year, with inflation reaching our 2 percent goal in 2025. But my outlook is contingent on appropriate monetary policy.”

“Even that forecast could turn out to be optimistic. Some recent research by economists at the Cleveland Fed presents a plausible case, based on a model and historical relationships in the data, that inflation could end up being much more persistent than current projections, despite the actions the FOMC has taken.4 While this research has not altered my view that there will be material improvement in inflation this year, it does inform my view that the risks to inflation remain on the upside.”

Fed Funds

“Precisely how much higher the federal 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, and that will depend on how much demand is slowing, supply challenges are being resolved, and price pressures are easing. At this juncture, the incoming data have not changed my view that we will need to bring the fed funds rate above 5 percent and hold it there for some time to be sufficiently restrictive to ensure that inflation is on a sustainable path back to 2 percent. Indeed, at our meeting two weeks ago, setting aside what financial market participants expected us to do, I saw a compelling economic case for a 50-basis-point increase, which would have brought the top of the target range to 5 percent.”

25bps or 50bps – March 22

“Indeed, at our meeting two weeks ago, setting aside what financial market participants expected us to do, I saw a compelling economic case for a 50-basis-point increase, which would have brought the top of the target range to 5 percent.”