Federal Reserve Bank of Cleveland President Loretta Mester repeated that she thinks the U.S. central bank needs to get rates above 4% by early 2023 and leave them there for some time to cool the hottest inflation in nearly 40 years.
Mester also reiterated that she does not expect the Fed to cut rates next year, noting that policy makers need to keep inflation expectations from becoming unanchored.
"In formulating my monetary policy views, I will be guarding against declaring victory over the inflation beast too soon," Mester said Wednesday during remarks prepared for an MNI webcast.
The Fed official, who votes in monetary policy this year, said she would like to see several months of declines in month-over-month inflation readings before concluding that inflation has peaked.
She also said she will be carefully watching medium- and longer-term inflation expectations for signs as to whether high inflation is becoming embedded in the economy. "At that point, it would be considerably more difficult and more costly to bring inflation down," she said.
Fed officials lifted rates by 75 basis points in July and June and could consider a similar move, or a 50-basis-point increase, when they meet on Sept. 20-21.
Mester said the size of a rate increase at any particular Fed meeting, as well as where rates peak, will depend on the outlook for inflation. Answering questions after her speech, Mester declined to specify how big an increase she favored this month, saying those decisions will be made at the meeting.
"It's better to focus on what is the path of interest rates," she said. "We do have to raise rates from where they are now. I think we have to get into positive territory for the real rate and that means we're going to have to do more work than where we are now to get inflation on a downward path."
The employment report for August showed that jobs growth moderated and the unemployment rate rose to 3.7% as more workers entered the labor force. If participation continues to rise, it could boost the Fed's odds of achieving a "soft landing" for the U.S. economy and lessen the need for more aggressive tightening.
But policy makers will also receive another update on the consumer price index on Sept. 13, a report that economists and officials say will be important.
The central bank is also reducing its balance sheet by up to $95 billion a month, a process that should remove accommodation. Mester repeated that she would support selling mortgage-backed securities at some point to help return the Fed's portfolio to one that invests primarily in Treasuries. She also said she is more concerned about how the balance sheet reduction affects liquidity in financial markets than she is with determining how much that process affects interest rates.
The policy maker said that while recession risks are rising and the Fed's rate increases are affecting interest sensitive sectors such as housing, strong labor market growth suggests the U.S. economy is not currently in a recession. She expects economic growth to slow to below 2% for this year and next year, for job growth to ease and the unemployment rate to rise. Still, she said the economic projections she will submit at this month's meeting do not predict a recession.
