Cleveland Federal Reserve Bank President Loretta Mester said on Monday that the U.S. economy is recovering strongly but she is not yet convinced that recent inflation readings will be enough to satisfy the price stability goal the U.S. central bank revamped a year ago.
The policymaker said there were upside risks to inflation and that officials need to pay close attention to price changes, but that she expects some inflation metrics will come down after some of the supply chain disruptions caused by the pandemic are resolved.
“I’d like to see a little more data before I can arrive and conclude that…we’re at 2% and on the way above 2% for some time,” Mester said.
Mester’s remarks highlight the growing tension among Fed policymakers as they approach a turning point in their policy without broad agreement on some of the key metrics that define their goals.
The Fed slashed interest rates to near zero last year at the start of the pandemic and began purchasing $120 billion a month in Treasuries and mortgage-backed securities to stabilize markets and support the economy. Fed officials largely agreed at their July meeting that the economy has improved enough for them to start reducing the pace of those asset purchases later this year, minutes of that meeting show.
Under their current guidance, however, the tightening phase that follows that – interest rate increases – cannot start until conditions clear an even higher bar: The economy has to be at maximum employment and, in addition to rising to 2% – which it already has – inflation must be on track to moderately exceed 2% for some time. Doing so will help satisfy policymakers’ longer-run goal of inflation that “averages 2% over time” because it has fallen short of target for most of the last decade.
A TRICKY BUSINESS
Defining those parameters is proving tricky, with little evidence of wide agreement.
For instance, several Fed officials, including Atlanta Fed President Raphael Bostic, say the substantial overshoot in inflation over the last several months means the central bank has already achieved that average inflation target by some measures. On the other hand, Chair Jerome Powell on Friday said it’s not clear to him that the current inflation pressures have sufficient staying power to meet their objective.
Mester said she wants to see more data shedding light on what inflation will look like next year before she can reach any conclusions. She will look at what inflation has done over the past five years, but will also look forward at what inflation is projected to be using forecasts from the Cleveland Fed and other metrics.
It will also be important to watch inflation expectations to ensure they are anchored at 2% and likely to stay there – a goal that was difficult to reach even before the pandemic, Mester said. “I’m sort of not in the camp that we’ve already met that criteria,” said Mester, who will become a voting member of the Fed’s policy-setting committee next year.
As for the labor market, Mester said the U.S. economy is not yet at maximum employment. The fact that there are more job postings than there are unemployed people suggests there may be a mismatch between the jobs being created and the people searching for work.
The pandemic may have changed where the strongest job growth happens, if for instance a subset of workers stop having to commute into downtown hubs to do their jobs, she said. Other workers may still be held back by school closures or disruptions to child care arrangements.
“You have to take the lens that there are going to be some things that are different,” Mester said.
The policymaker repeated her view that the Fed’s criteria for beginning to reduce its asset purchases have been met and that she would like to start tapering the purchases this year and be done with them by the middle of next year.
But she emphasized that the central bank would still be supporting the economy even after it slows its purchases.
“We’re still going to be very accommodative,” Mester said. “We’re just not going to be as accommodative as we said was needed and felt was needed during the height of the pandemic.”