Cleveland Fed President Loretta Mester said Thursday that the latest findings on inflation do not change the calculation for three rate cuts in the second half of 2024.
In an exclusive interview with Yahoo Finance on Thursday, Mester said that even though the Fed's recommended inflation measure has risen month-over-month, inflation has fallen over time toward the Fed's 2% target. “My view hasn't changed that much,'' he said.
But “this shows that the Fed has a little more work to do here in terms of making sure we can meet our 2% goal.”
He still predicts three cuts in 2024, but he first made this prediction in December. “If the economy develops as I expect, that feels right at this point,” Mester said.
Cleveland Fed President's new comments come after the release of the core personal consumption expenditures (PCE) index, which excludes food and energy costs, and is closely monitored by the central bank.
January saw a 2.8% year-on-year increase, the slowest annual growth since March 2021, when it rose 2.2%.
However, compared to the previous month, core PCE rose 0.4%, the highest level since January 2023, and an increase from December's 0.1% rise. This monthly increase marked a significant change in inflation data.
Before Thursday's announcement, the six-month annualized rate of inflation had been below the Fed's 2% target for two straight months. After January's data, the annual rate of increase in his PCE price for six months is he 2.5%.
Mester, who holds a vote on the Fed's rate-setting committee, said the Fed has an opportunity to be patient given strong economic growth and a healthy job market.
“I think we have an opportunity here to make sure things are evolving correctly,” she said. “I think the economy and monetary policy are currently in good shape.”
Many Fed officials, including Fed Chairman Jerome Powell, have warned of patience about lowering interest rates after stronger-than-expected inflation and strong employment data. Some have warned that the path down to 2% will be “stiff”.
The Consumer Price Index (CPI) in January was higher than economists expected, as was the Producer Price Index (PPI), which tracks the prices businesses pay to make goods and services.
Investors are listening. Since the beginning of the year, the market has bet on six rate cuts starting in March, but it has returned to three cuts since June.
One of Mr. Mester's colleagues, Atlanta Fed President Rafael Bostic, reiterated his prediction for rate cuts this summer and appealed for patience in a speech Thursday.
“The last few inflation numbers released indicate that this is not an inexorable march to 2% any time soon, but rather some bumps along the way,” Bostic said.
Mester told Yahoo Finance that he expects demand to slow as high interest rates cool the economy at the moment.
He also pointed to signs that consumers are becoming more cautious about reducing spending and business investment.
As growth slows, “its normalization will be what brings inflation back in full force.”
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