In a Financial Times interview, Cleveland Fed President Loretta Mester put emphasis on the duration of maintaining restrictive monetary policy to ensure that inflation reliably returns to the 2% target. That’s contrary to market expectations, which centers on timing and extent of rate cuts.
Mester’s key statement, “The next phase is not when to reduce rates… It’s about how long do we need monetary policy to remain restrictive in order to be assured that inflation is on that sustainable and timely path back to 2%,”
“The markets are a little bit ahead. They jumped to the end part, which is ‘We’re going to normalize quickly’, and I don’t see that,” she added.
When the discussion eventually shifts to the timing and pace of rate cuts, Mester highlighted the importance of one-year forward inflation expectations and their alignment towards the 2% target.
“If you don’t take action as expected inflation comes down, then you’re really firming policy,” she warned. “You don’t want to inadvertently become more restrictive than you think is appropriate.”
