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.

Philadelphia Fed President Patrick Harker, in a local radio interview overnight, shared expressed that while there will be a need to lower interest rates eventually, this shift should not happen “right away” or “too fast.”

Harker stated, “I’ve been in the camp of, let’s hold rates where they are for a while, let’s see how this plays out, we don’t need to raise rates anymore.”

Looking ahead, Harker acknowledged the necessity of reducing rates, saying, “it’s important that we start to move rates down.” However, he emphasized a gradual approach: “we don’t have to do it too fast, we’re not going to do it right away, it’s going to take some time.”

Harker also added a note of caution regarding the economic outlook, particularly concerning inflation. “Let me be clear: The job on inflation is not done, but we are moving in the right direction, things are starting to look better and better.”

The most important parts of the new proections are firstly, median fed funds rate projection is unchanged at 3.4% in 2021. That is, Fed expects to stop after three hikes in 2019 and one more in 2020. However, secondly, the longer run federal funds rate was raised from 2.9% to 3.0%. That is, the neutral rate was somewhat lifted.

All in all, Fed’s new projections clearly show that the impact of fiscal stimulus of tax cuts and others would fade rather quickly, with notable fall in GDP growth in 2021 and rise in unemployment rate too. With core inflation holding at 2.1% in 2021, there is no need for further rate hike.

GDP projections for 2018 and 2019 are raised to 3.1% and 2.5% respectively. For 2020, GDP projection was kept unchanged at 2.0%. For 2021, it’s forecast to slow further to 1.8%.

Unemployment rate projection for 2018 was raised from 3.6% to 3.7%. For 2019 and 2020, it’s kept unchanged at 3.5%. And unemployment rate is expected rise back to 3.7% in 2021.

Core PCE projection was unchanged through out, at 2.0% in 2018, 2.1% in 2019, 2020 and 2021.