EXCLUSIVE: Ex-Cleveland Fed Pres. Mester Sees Rate Hike This Year

By Adriana Reinecke Washington, July 21 (Jiji Press)–Former Cleveland Federal Reserve Bank President Loretta Mester said in a recent interview that the Federal Reserve may need to raise interest rates before the end of the year. In the online interview with Jiji Press on Friday, Mester expressed concern that the Fed’s 2 pct inflation target has not been met for more than five years and warned about inflationary pressures stemming from higher oil prices amid the worsening situation in the Middle East and from the artificial intelligence boom. The former president also voiced skepticism toward Fed Chair Kevin Warsh’s argument that productivity gains from the AI revolution will eventually ease inflationary pressures and make interest rate cuts possible. Despite a series of successive and overlapping supply shocks, including the high-tariff policies of the administration of U.S. President Donald Trump and soaring oil prices resulting from the ongoing conflict involving the United States, Israel and Iran, Mester said the U.S. economy has been “surprisingly resilient.” Given the strength of the real economy, she said, “It’s hard to believe that current policy is restrictive.” Asked about the possibility of a rate hike this year, Mester predicted, “I think they’re going to discuss it in July,” referring to the Federal Open Market Committee meeting later this month. “If we continue to see more pass through now that oil prices are going up again, I think they’re going to have to probably raise interest rates.” However, she added, “I don’t think they necessarily have to do it in July,” citing, among other factors, the moderation in the June consumer price index growth. Regarding the argument that productivity gains from AI will eventually allow the Fed to cut rates, Mester predicted that if productivity improvements raise the economy’s potential growth rate, the neutral rate–the rate that neither stimulates nor restrains economic activity–is also likely to rise. With economic growth accelerating, she said, “that doesn’t necessarily give you leave to cut interest rates.” While Warsh has been a vocal skeptic of forward guidance, Mester said that she believes that “it’s important for the Federal Reserve to give a sense of their reaction function–not necessarily what policy will do, but what policy is likely to do conditional on how the economy evolves.” She continued, “Warsh is going to have to give us more information about how the FOMC will be reacting conditional on the economy.” Commenting on the Fed’s new task forces, which bring together outside experts to analyze five areas of Fed policy, including better methods of tracking inflation and possible revisions to the Fed’s communication strategy, among others, Mester welcomed the initiative, saying that she is “excited to see what comes out of that process.” END [Copyright The Jiji Press, Ltd.]