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Fed's Mester says central bank has yet to make a dent in inflation

By Michael S. Derby

NEW YORK (Reuters) -Federal Reserve Bank of Cleveland President Loretta Mester said Tuesday that even with a large amount of rate rises this year, the central bank has yet to get surging inflation under control and will need to press forward with tightening monetary policy.

“Unacceptably high and persistent inflation remains the key challenge facing the U.S. economy,” Mester said in a speech given before a gathering held by the Economic Club of New York. “Despite some moderation on the demand side of the economy and nascent signs of improvement in supply-side conditions, there has been no progress on inflation,” Mester said.

The policymaker is a voting member of the rate-setting Federal Open Market Committee, which has increased the cost of short-term borrowing aggressively this year. At its September policy meeting officials raised their federal funds target rate range to between 3% and 3.25% and penciled in more increases into next year, eyeing a 4.6% federal funds rate.

Mester said in her remarks she expects to see more increases than the collective view of officials.

“Monetary policy is moving into restrictive territory and will need to be there for some time in order to put inflation on a sustained downward path to our 2% goal,” she said, adding “I do not anticipate any cuts in the fed funds target range next year.”

Mester did not comment on what size rate rise she’d like to see at the next FOMC meeting and explained “the size of rate increases at any particular FOMC meeting and the peak fed funds rate will depend on the inflation outlook, which depends on the assessment of how rapidly aggregate demand and supply are coming back into better balance and price pressures are being reduced.”

She also pushed back on the idea that central bank rate rises were in some fashion outsized relative to history. The fed funds target was at near zero levels in March and recent Fed increases have been in increments of 0.75 percentage point, which is much larger in size than changes over recent decades.

When it comes to the path the Fed has been on, "I don’t think it’s aggressive relative to where inflation is and how fast inflation has moved up."

Mester said that inflation should come down to 3.5% by next year and back to the Fed’s 2% target in 2025. The Fed’s preferred price pressure gauge, the personal consumption expenditures price index, stood at 6.2% in August versus a year ago.

Mester said the likely path of Fed policy will depress activity relative to the recent path and will push the unemployment rate, now at 3.5%, up to 4.5% next year and higher in 2024.

“With growth well below trend over the next couple of years, it is possible that a shock could push the U.S. economy into recession for a time,” Mester said, adding “none of this is painless,” but it is necessary, as high inflation exerts heavy costs on the economy.

But Mester added that while there are risks of a downturn, "I don’t think that we’re going to get into a deep recession" and underlying economic fundamentals still look pretty good.

In comments to reporters after her speech, Mester said she did not see any notable signs financial markets were running into distress and that the Fed was monitoring market activity.

"There is no evidence that there is disorderly market functioning going on at present," she said

(Reporting by Michael S. Derby; Editing by Chizu Nomiyama and Andrea Ricci)