Cleveland Federal Reserve President Loretta Mester: The Federal Reserve may need to maintain stable interest rates for a longer period

According to the Zhitong Finance APP, Loretta Mester, President of the Federal Reserve Bank of Cleveland, stated on Tuesday that the Federal Reserve needs to maintain stable interest rates for a longer period to wait for inflation to decline further and to assess the impact of new government policies on the economy.

In a preparatory speech at an event in Lexington, Kentucky, she noted, "We have made good progress, but the 2% inflation target is still not in sight. As long as the labor market remains healthy, I need to see broader evidence that inflation is sustainably returning to 2% before making further adjustments to policy."

Mester emphasized that current monetary policy needs to remain patient, primarily based on two key factors. First, she mentioned that inflation still carries upside risks, particularly due to strong growth in consumer spending, and that last year's interest rate cuts may have a lagging effect on economic activity.

Secondly, she highlighted the uncertainty brought about by new government policies, including changes in regulations, taxes, immigration, and tariffs. Mester stated that the Federal Reserve needs time to analyze the impact of these policies and adjust monetary policy accordingly.

"For example, with tariffs, we need to patiently assess their ultimate impact," Mester pointed out. "Given the recent history of high inflation, the risks to the inflation outlook remain tilted to the upside, which could delay the process of inflation returning to 2% and further increase the risk of inflation embedding in the economy."

Just a day before Mester's speech, President Trump ordered a 25% tariff on steel and aluminum imports and a new 10% tariff on goods from China. Additionally, while the 25% tariffs on Canada and Mexico have been postponed, they remain unresolved. The uncertainty of these policies requires the Federal Reserve to more cautiously assess the economic environment to ensure the adaptability of monetary policy.

Mester reiterated that the current policy of the Federal Reserve is only "moderately restrictive" and added that the Federal Reserve "may be at or near neutral levels."

In a subsequent discussion, Mester stated that she does not expect interest rate hikes in 2025. "While my baseline expectation is not for rate hikes this year, the uncertainty of policy remains significant, and we need to closely monitor various policies and their impacts before making decisions," she said.

Federal Reserve officials decided to keep interest rates unchanged at last month's meeting, following three rate cuts in the second half of 2024. However, at the December meeting last year, Mester voted against the third consecutive rate cut, believing that rates should remain unchanged until there is clearer evidence of declining inflation.

Mester indicated that she will closely monitor inflation data early this year to see if businesses will implement significant price increases at the beginning of the year, as they did last year. The latest consumer price index (CPI) data, which is of broad market interest, will be released on Wednesday