Fed Mester sees monetary policy turning more restrictive this year

In a speech yesterday, Cleveland Federal Reserve President Loretta Mester highlighted her expectation that monetary policy will move “somewhat further into restrictive territory this year,” with the fed funds rate surpassing 5% and the real fed funds rate remaining in positive territory for an extended period.

Mester explained that the precise extent and duration of the federal funds rate hike will depend on how inflation and inflation expectations are affected by demand slowing, supply challenges being resolved, and price pressures easing. She noted that her forecast aligns with the modal forecasts of FOMC participants released two weeks ago, although she sees “somewhat more persistent inflation pressures than the median forecast among participants.”

According to Mester, inflation will show a substantial improvement, as price pressures are expected to decline from their current 5% YoY increase to 3.75% by the end of 2023 and 2% by 2025. She also anticipates a slowdown in economic growth this year, followed by a rebound in 2023. In terms of unemployment, Mester projects a rise from the current 3.6% to a range of 4.5% to 4.75% by the conclusion of 2023.