Cleveland Fed President and FOMC member Loretta Mester said on Thursday in an interview on CNBC that the task for the Fed is to remove accommodation at a pace necessary to bring inflation under control. Mester said that the situation in Ukraine adds to economic uncertainty and adds upside risks to inflation, making it more important than ever that the Fed takes action. There is potential for a large rise in energy prices and supply chain issues continuing for longer, she added, warning that this increases the chances that high inflation gets embedded in the US.
Mester said that starting with a 25bps hike this month followed by further increases in the coming months would put us in a good position, noting that she expects inflation to remain at 3.5% or 4.0% or even higher at the end of the year. Mester said that while we need to be thoughtful about the situation in Ukraine, strength in the US economy and imbalances all point towards a deliberate removal of monetary stimulus.
If by the middle of the year, after Fed rates hikes and balance sheet trimming, we don't see inflation moving back down, that would signal the need to remove accommodation at a faster pace, Mester said. It could very well be that interest rates need to move back above long-run neutral (estimated around 2.0-2.5%) to tame inflation she warned, emphasising that we can go faster in reducing the balance sheet this time compared with last.