Rob Kim
As things stand now, the Federal Reserve may need to raise the federal funds rate one more time in 2023 then “hold it there for some time,” said Cleveland Fed President Loretta Mester in a speech on Monday.
That pause will allow the central bank to “accumulate more information on economic developments and assess the effects of the tightening in financial conditions that has already occurred,” she said. Recall that the Fed has raised its policy rate by 525 basis points since March 2022 in its campaign to bring down inflation.
The policymakers will also have to watch for potential risks and how they affect the economy. “There is considerable uncertainty around the outlook: for example, the slowdown in the Chinese economy, the possibility of an extended UAW strike, and the potential for a government shutdown later this year all pose some risks around the outlook.”
There are also risks of tightening too much or too little. Tightening too much would slow the economy more than needed and tightening too little would allow high inflation to persist, she said.
It’s important to get it right, she noted, because “getting inflation back to 2% in a timely way puts the economy in a better position to weather the next shock, whenever it occurs.”
