Loretta Mester, president of the Federal Reserve Bank of Cleveland, joined Yahoo Finance on the sidelines of the annual Jackson Hole symposium to talk about the Federal Reserve’s shooting of inflation in the midst of a recession.
Below is a transcript of his appearance, which was recorded and broadcast on August 26.
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BRIAN CHEUNG: Yahoo Finance at the Jackson Hole Economic Symposium. I’m sitting next to Cleveland Federal Reserve Chair Loreta Mester, President Mester, I’m so glad to see you.
LORETTA MESTER: Thank you. Great to be here.
BRIAN CHEUNG: So let’s go. This morning we heard a pleading speech from the chairman of the Federal Reserve, much shorter than usual. I wondered what his main classes were in that speech.
LORETTA MESTER: Well, I think it’s a very strong speech. I think it’s a very smart message that needed to be sent and I think he conveyed it well,
BRIAN CHEUNG: When you say it had to be sent, what was that message?Why, why did he have to. . . ?
LORETTA MESTER: Well, I think it’s a vital message because I think there would possibly be a lot of confusion in the markets about what the plan was for the Fed. And I think it’s been very transparent that we still want to lower inflation, that we’re going to use our team to do that. And that we recognize that, you know, moderating demand is going to involve some pain, but it’s vital to do so to get inflation back to that level. downward path towards our 2% target. And it will be less expensive to do so now than to fail in this mission.
BRIAN CHEUNG: So you say pain, you say expensive. These are words we probably shouldn’t hear when it comes to Federal Reserve policy, but the hard labor market, I guess, is the main concentrate of that. 3. 5% unemployment, what pain does it cost the labor market to reduce inflation?
LORETTA MESTER: Well, just to be clear, there’s already a lot of pain. This inflation is so high that it literally inflicts a lot of misery on many families. So, you know, it’s not like an or: no pain or, you know, pain later or pain now. It is painful right now for many families. It is very difficult to have to decide between the essentials. That being said, you know, tempering demand so that supply is more balanced, I think expansion is going to be off trend for a while. And I think the unemployment rate is starting to build up from the titles that we have now. Now, how much will depend on how much moderates are temporarily requested and how it temporarily lowers inflation and maybe some positives on the source side, if the constraints on supply on the source side, you know, are easing? But having said that, because the hard labor market is very, very tight right now, you can go back to a comfortable landing environment, which is what we’re looking for, depending on what’s going on in the job market. hardPlaceArray Again, Unemployment will probably pile up, but I don’t necessarily think it will succeed at the typical level, you know, what we see during, you know, deep recessions. It does not have to be this way.
BRIAN CHEUNG: So at that point, it turns out that the Fed still needs to continue with its rate hikes. That was the implication of the speech, the next assembly in September. He wonders if he has any concept of whether or not it’s already that unusually giant length that we’ve noticed in 75 base problems or that at some point maybe he’ll check at some point to make those hikes a little smaller.
LORETTA MESTER: Yes. So, at this point, we’re going to take a look at other knowledge before this meeting, but I think it’s inopportune to think that inflation has peaked. So, the July inflation report is positive, it’s smart news. , however, was essentially based on a drop in energy costs and we know they are volatile. Again, there’s still a lot of inflation, and I think we’re going to have to raise interest rates and keep doing that until you get compelling evidence and inflation is going down.
BRIAN CHEUNG: When you’re communicating about irrefutable evidence, you’ve already made comments recommending that while declining oil costs would possibly have led to a CAP on the CPI, and now, as of this morning, pcE reports also recommend that it’s not enough. Would you want to be told in the inflation report that rate hikes are starting to take their toll around here?
LORETTA MESTER: Well, core inflation is a smart trend indicator and there are other measures of core inflation. Like core measures, the Cleveland Federal Reserve produces medium and average measures. And those are necessarily smart signals of the direction of inflation. . I’d like to see more evidence, several, you know, several months of evidence that they’re going backwards. We know that service inflation is still high, and we know that rents take time to fall and are very high. Again, I think it’s inappropriate to say that inflation has peaked and is in this downward trend. We want it to have a sustainable downward trend. And I’m just going to wish I saw, you know, several more months of, you know, greater knowledge of inflation, so I can even say it’s at its peak.
BRIAN CHEUNG: Now, the general history of inflation, I guess, is all you’re looking to read, how markets interpret the Fed’s strategy. We saw a great easing of monetary situations after the June meeting, which has possibly set the tone for the president’s speech today. Do you think the markets now get the message? Because you noticed a bit of a reversal in recent weeks, the functionality of the headlines has come back a little higher. Is it tight enough to check and realize what you’re doing here?
LORETTA MESTER: Well, you know, markets also make a lot of decisions based on their reading of the long term and what the Fed plans to do and how we can do it. All we can do at the Federal Reserve is make sure we send the message as we see it. You know, we’re not prophetic, are we? Therefore, all of our decisions are based on how the economy is converting and what incoming information tells us about our perspective and sheds light on our perspective. So again, we can give them, we have an inflation problem, it’s too high. This is unacceptable, we are on track to expand interest rates until we see inflation come back down to 2% and markets will react the way they react, let them know, it’s based on their difference of opinion about the outlook or whether it’s because they don’t perceive or that we’re committed to it. But I can tell you that we are very determined to make it happen.
BRIAN CHEUNG: Now, in that commitment, there’s the changing effect of financial policy, which makes the timing of all of this complicated from the point of view that after raising rates, it will take a while to convey it to the economy. , however, it is also basing those decisions on economic knowledge that may reflect the situations of the last 4 weeks. So how do you plan to do that? What do you think of reviews, for example, when you overlook to make decisions?
LORETTA MESTER: So you know that knowledge is going to be reviewed. Then you come out knowing this fact and therefore you take it into account. I would say yes, knowledge will possibly inform you about the last 4 weeks, but one is the implications of that knowledge for the future. ThatArray and the perspectives that count my political decisions. So, for example, I don’t think it’s appropriate for us to keep raising interest rates until inflation is at 2%. Like, it’s not prospective, no. We know that inflation, you know, we know that financial policy runs across the entire economy with a lag. So, we’re going to have to, you know, navigate on the fly. And this is based on the evaluation of the scenario. of demand relative to supply. And if we put that back into greater balance, right?And this will shed light on the political path forward,
BRIAN CHEUNG: Black horses, China is slowing down. Concerns about recession in Europe as well, inflation is a global phenomenon. How you feel about it when you expand policies here nationally.
LORETTA MESTER: Well, those are dangers to our perspective. These are dangers to our forecasts, aren’t they?So we have to keep that in mind when we think about what’s going on. So, the scenario in China is one where it would have an indirect effect on the U. S. economy, through our exports. Europe is another scenario that presents upward dangers for energy prices, which, of course, will affect our measures of inflation. and problematic dangers. And that will be part of the assessment as we move forward to know how much demand for moderates and balances and how temporarily it balances with supply.
BRIAN CHEUNG: Quantitative adjustment on the balance sheet. It’s about to succeed at the full rate of decline in September, $95 billion per month of fall. At the same time, if you are accelerating the speed of rate increases or have accelerated the speed of rate increases over the past 4 meetings or so, why not also be more competitive in quantitative tightening with the prospect of even actively promoting values?
LORETTA MESTER: Yeah, well, as you know, in the minutes of the March meeting, at some point we had to think about promoting some of the [mortgage-backed securities], but at this point that doesn’t seem so vital to the way forward. I think we’re sticking to the plan that we’ve put together, which doesn’t exclude sales, but it’s very methodical, you know, to allow the circular moment to take place in a very predictable way. This turns out to be the right thing to do right now. And then our active tool for policy will be the federal budget rate.
BRIAN CHEUNG: Fiscal policy. I know he has no tendency to comment on express policies, however, he is very interested in the inflation relief law, even given the macro nature of this action, he wonders how he thinks it affects policy now. Do you think that can also influence the effect of financial policy?
LORETTA MESTER: Well, if you look at some of the analysis that’s been done on this law, the effects are going to be in the future, more immediate, so it doesn’t influence my view of the right financial policy right now.
BRIAN CHEUNG: And then the last question here, when we’re just talking about how the Fed wants to spend here, not to mention a point of view. Americans looking at this wonder when this pain will be worse. And when will it stop?
LORETTA MESTER: Yeah, well, I think we’re going to have to raise interest rates probably a little bit above 4% until early next year and keep them there. I don’t have a recession in my own forecast for the economy. I think the expansion will be less than 2%, which is my trend rate. And I think the unemployment rate will go, you know, a little bit more than it is now at 4, 4 and a quarter percent, and it’s becoming painful for the other people it affects. But the choice is also very painful. We cannot continue to have a strong labour market and return to the very strong labour market situations that we have experienced over the last 10 years plus expansion, unless we keep inflation under control. Therefore, it is a bit painful now for a much greater future.
BRIAN CHEUNG: Cleveland Federal Reserve President Lorena Mester in Jackson Hole. Thanks a lot. Enjoy.
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