Federal Reserve Will Need To Raise Interest Rates Above 5%: FED Official

U.S. policymakers continue to maintain a hawkish stance. The Federal Reserve has been increasing interest rates month after month. Despite being in the midst of a banking crisis, the FED shot up the rate by 25 basis points last month. Doing so brought the policy benchmark to a target range of 4.75% to 5%.

Now, a central bank official has called for a rate hike. According to Federal Reserve Bank of Cleveland President Loretta Mester, policymakers should push up the benchmark rate above 5% this year. In fact, the official further suggested that the FED should hold the rate there for a while to stamp out inflation.

Also Read: Federal Reserve Raises Interest Rates by 25bps

Mester expects “meaningful” improvement in inflation 

Talking at an event on Tuesday, Mester opined that to put inflation on a steady path down to 2%, monetary policy needs to move “somewhat further into restrictive territory this year, with the FED funds rate moving above 5% and the real FED funds rate staying in positive territory for some time.”

Commenting on the FED’s latest interest rate hike, Mester said she was “very comfortable” with FED officials’ decision to raise rates, despite the ongoing banking crisis. Emphasizing on the current state of affairs, she said,

“So far that seems to have stabilized at the moment.”

Furthermore, the official added that she does not expect policymakers to cut rates in 2023. Factoring-in other facets, she added,

“Precisely how much higher the federal funds rate will need to go from here and for how long policy will need to remain restrictive will depend on how much inflation and inflation expectations are moving down, and that will depend on how much demand is slowing, supply challenges are being resolved, and price pressures are easing.”

That said, the Mester expects “meaningful” refinement on the inflation front soon. As such, inflation in the U.S. been gradually declining of late. The CPI fell to 7.1% in November last year, a number lower than expected. Likewise, it further dropped down to 6.5% in December, 6.4% in January and 6% in February this year.

Also Read: U.S. Inflation Rate Falls to 6% in February