Cleveland Federal Reserve President Loretta Mester said Tuesday she still expects interest rates to cut this year but ruled out a next policy meeting in May.
Mester also noted that the long-term forecast is higher than policymakers had previously assumed. Fellow policymaker, San Francisco Federal Reserve Bank President Mary Daley, also said Tuesday she expects cuts this year, but not until there is more convincing evidence that inflation has been brought down.
The central bank official noted progress being made in tackling inflation as the economy continues to grow. If this continues, rate cuts are likely, although she gave no guidance on the timing or extent.
“I continue to believe the most likely scenario is that inflation will continue to decline to 2 percent over time. But I need to see more data to increase my confidence,” Mester said in prepared remarks for a speech in Cleveland.
More inflation data will provide clues as to whether some of the higher-than-expected data this year were either temporary blips or a sign that progress in inflation is “stalling,” she added.
“I don’t expect that by the time the next FOMC meeting comes around, I’ll have enough information to make that decision,” Mester said.
The remarks came nearly two weeks after the Federal Open Market Committee, which sets rates, again voted to keep its key overnight borrowing rate in the range of 5.25% to 5.5%, where it has been since July 2023. A statement after the meeting echoed Mester’s remarks. that the committee needs to see more evidence that inflation is approaching its 2% target before it starts cutting rates.
Mester’s comments appeared to rule out the possibility of a rate cut at the April 30-May 1 FOMC meeting, a view that was also reflected in market prices. Mester is a voting member of the FOMC but will leave in June after serving his 10-year term.
Futures traders expect the Fed to begin easing policy in June and cut it by three-quarters of a percentage point by year-end.
San Francisco Fed President Daly said three cuts this year were a “very reasonable baseline,” although she said nothing was guaranteed. Daley is also a FOMC voter this year.
“Three rate cuts are a forecast, and a forecast is not a promise,” she said, later adding: “We’re getting there, but it won’t happen tomorrow, but it won’t happen forever.”
Expecting a rate cut, Mester said she believes the long-term federal funds rate will be higher than long-standing expectations of 2.5%. Instead, she sees the so-called neutral rate “r*” at 3%. The rate is considered to be the level at which the policy is neither restrictive nor expansionary. After the March meeting, the forecast for the long-term rate rose to 2.6%, indicating that there are other bank members leaning higher.
Mester noted that rates were very low when the Covid pandemic hit and the Fed had little wiggle room to stimulate the economy.
“At this stage, we are seeking to align our policies well with economic developments to avoid the need to act aggressively,” she said.