Cleveland Fed's Take on Interest Rates and Inflation

Cleveland Federal Reserve President Loretta Mester said on Tuesday that current interest rate restrictions are only 'modestly' restrictive, and officials may keep borrowing costs at stable levels for some time. Mester noted that despite recent progress, the Fed still has 'some way to go' in reaching its inflation goal.

Mester elaborated that official data is lagging and may not fully capture current dynamics, including the potential risk of recent oil price increases fueling inflation expectations. 'The most likely scenario is that policy will remain unchanged for quite some time before the committee initiates very modest rate cuts to return policy to neutral,' she stated.

The Fed's Stance and Economic Uncertainty

Federal Reserve officials have held interest rates steady for the past four meetings to give themselves more time to observe how former US President Donald Trump's tariffs and other policies will impact inflation and growth. Tensions in the Middle East have also added to the risks facing the global economy.

The latest projections released at the June meeting showed that Fed policymakers still expect two rate cuts this year, according to median forecasts. However, the projections also showed some divergence, with seven officials expecting no rate cuts at all this year. This reflects a state of uncertainty about the path of the economy and inflation.

A Watchful Approach

Mester indicated that the economy's resilience suggests the risk of maintaining stable interest rates is low. She said she does not see economic weakness that warrants a rate cut but is 'remaining vigilant to that possibility.' She added that interest rates may already be close to a neutral level, that is, a level at which the Fed neither stimulates nor slows the economy.

Differing Viewpoints

Officials who have spoken since that meeting have expressed a range of views on the timing of any action. Fed Governors Waller and Bowman, both appointed by Trump, have suggested it may be possible to cut rates as early as July if inflation remains under control. Meanwhile, Daly of the San Francisco Fed mentioned that a rate cut in the fall is a more likely possibility.

Federal Reserve Chairman Jerome Powell, in his testimony to the House Financial Services Committee, reiterated: 'We are in a good position to wait and learn more about the likely path of the economy before considering any adjustments to our policy stance.'

Powell had stated last week that he expects tariffs to lead to higher prices and wants to see some of that impact reflected in the economic data before officials adjust interest rates. This cautious approach shows that the Fed prefers to gather more evidence before making any decisions that affect the economy.