Cleveland Fed President Loretta Mester acknowledged in a speech yesterday the robust state of the economy with a cautious stance on inflation and interest rates. She signaled the possibility of another rate hike this year.

“I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time,” she said.

However, Mester also underscored the contingent nature of future monetary policy decisions, stating, “whether the fed funds rate needs to go higher than its current level and for how long policy needs to remain restrictive will depend on how the economy evolves relative to the outlook.”

Inflation, according to Mester, continues to pose a significant challenge. She plainly remarked that inflation remains “too high”. Though she expects some easing of price pressures, she cautioned that “the risks to the inflation forecast remain tilted to the upside.”

On a positive note, Mester expressed optimism about the broader economic picture. “The economy is on a good path,” she observed. Delving into labor market dynamics, she pointed out that while conditions remain robust, the disparity between labor demand and supply is shrinking, indicating that “firms are finding it easier to find the workers they need.”

San Francisco Fed President Mary Daly articulated the challenges surrounding US inflation, describing it as likely to be a “bumpy ride” going forward. In her comments yesterday, Daly highlighted there is “uncertainly about what the next few months of inflation will look like”.

Daly presented two potential scenarios that could influence Fed’s interest rate decisions. In the first scenario, if inflation continues on its recent downward trend alongside a cooling job market, Daly noted that lowering interest rates would be appropriate.

Conversely, Daly outlined a second scenario where inflation does not decline as expected but instead remains stagnant, as observed in the first quarter of this year. In such a situation, Daly stated that it would not be appropriate to cut interest rates, unless there is a concurrent weakening in the job market.