Fed’s Mester Backs ‘Methodical’ Rate Hikes, Not a 75 Basis-Point Move

(Bloomberg) -- Federal Reserve Bank of Cleveland President Loretta Mester pushed back against raising interest rates by 75 basis points at a single meeting, while favoring being “very deliberate and very intentional” in tightening policy.

“It’s always good to remember that monetary policy transmits to the economy via expectations and movements in financial markets,” Mester said during an interview with CNBC on Friday. “So that’s why I kind of favor this methodical approach rather than, you know, a shock of 75 basis points. I don’t think it’s needed for what we’re trying to do with our policy.”

U.S. central bankers have signaled they are likely to raise interest rates by half a percentage point when they meet May 3-4, with at least one additional increase of that magnitude potentially warranted to curb the hottest inflation in 40 years. In addition, St. Louis Fed President James Bullard has opened a debate about doing a more aggressive 75 basis-point increase if needed.

Mester said she favors raising interest rates by 50 basis points in May and a “few more” times after that to bring rates to about 2.5% by the end of the year. She said that is the level she estimates to be “neutral,” referring to the interest rate that neither speeds up nor slows down the economy.

Officials can then assess how the economy and inflation are responding to the changes in monetary policy, supply chain disruptions and the war in Ukraine to determine if rates need to go above neutral to become restrictive, she said.

“When we get to that neutral rate, where policy goes after that is going to really depend on how that policy has affected the economy,” she said. “So let’s be on this methodical--  rather than overly-aggressive path -- and then see how policy transmits to the economy.”

Fed Chair Jerome Powell, outlining his most aggressive approach to taming inflation to date, said on Thursday that a 50 basis-point rate increase is “on the table for the May meeting” and pointed to minutes from the Fed’s March meeting showing that many officials viewed “one or more” such moves as appropriate.

Money markets are now pricing in at least four half-point hikes by the central bank’s September meeting, according to interest-rate swaps. 

Mester, who votes for monetary policy decisions this year, is the last Fed official scheduled to speak publicly before policymakers enter a quiet period ahead of the May meeting. The blackout begins at midnight.

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