Fed's Mester says one more U.S. rate hike may be needed

By Michael S. Derby

NEW YORK (Reuters) - Federal Reserve Bank of Cleveland President Loretta Mester said Monday that the U.S. central bank most likely isn’t done raising interest rates amid ongoing inflation pressures.

“I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time as we accumulate more information on economic developments and assess the effects of the tightening in financial conditions that has already occurred,” Mester said in the text of a speech to a group in Cleveland.

“But 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,” which is bounded by considerable uncertainty right now, the official said.

Mester’s remarks were her first public comments since the rate-setting Federal Open Market Committee meet last month and held rates steady, even as officials continued to collectively pencil in one more increase by the end of the year.

The Fed has raised rates aggressively over the last year and a half to help cool inflation. Ebbing price pressures allowed officials to keep the federal funds target rate range at between 5.25% and 5.5% in September. While the latest central bank forecasts suggested the Fed may keep rates higher for longer than it expected in the summer, there are real questions whether the central bank will in fact deliver one more rate increase this year.

Earlier on Monday, the Fed’s top bank overseer Michael Barr reiterated the Fed will need to keep rates up for a while to bring inflation back to target. Fed Governor Michelle Bowman said, “I remain willing to support raising the federal funds rate at a future meeting if the incoming data indicates that progress on inflation has stalled or is too slow to bring inflation to 2% in a timely way.”

In her speech, Mester said inflation remains “too high” while also saying there are ample signs price pressures are cooling as a strong economy comes into better balance. But even as price pressures fade, “the risks to the inflation forecast remain tilted to the upside,” she said, while noting there have been signs wage pressures are moderating.

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Mester said the economy has proved to be stronger than expected at the start of the summer. “The economy is on a good path,” she said, adding “labor market conditions remain strong, but the imbalance between labor demand and supply is narrowing and firms are finding it easier to find the workers they need.”

Mester also noted that the cost of credit has risen but said it has not tightened more than the path of monetary policy suggests.