Federal Reserve officials call for "patience," Harker states that interest rates have not reached a "substantial restrictive" level

According to the Zhitong Finance APP, Cleveland Federal Reserve President Loretta Mester stated that current interest rates have not yet reached a "substantial constraint" level, and officials should maintain stable rates for a period of time while waiting for evidence that inflation is returning to the 2% target level. Mester's message aligns with the views of several other Federal Reserve officials who spoke on Thursday. Although their levels of caution regarding the economic outlook vary, none suggested any intention to cut rates in the near term.

Mester also pointed out that monitoring inflation expectations and other indicators is crucial for assessing whether the financial environment aligns with the Federal Reserve's efforts to curb rising prices.

In a speech prepared for a conference in New York on Thursday, Mester stated, "I believe there is room for monetary policy to be patient in assessing the future path. This likely means maintaining the federal funds rate stable for a period of time."

Kansas City Federal Reserve President Esther George issued a more concerning signal, primarily driven by recent increases in inflation expectations and worries about economic growth.

George stated at an event in Arlington, Virginia, "While inflation faces upward risks, communication with contacts in my region and some recent data indicate that high uncertainty may weigh on economic growth. This means the Federal Reserve may need to balance inflation risks against growth concerns."

Philadelphia Federal Reserve President Patrick Harker was more optimistic, reiterating his confidence that as long as a certain level of patience is maintained, the Federal Reserve's current policy stance is sufficient to control price pressures.

Harker stated, "The policy rate remains sufficiently restrictive to continue to exert downward pressure on inflation over the long term without negatively impacting other aspects of the economy."

Waiting for Inflation to Cool

Federal Reserve officials kept interest rates unchanged last month, having lowered borrowing costs by a full percentage point at the end of last year. Policymakers indicated they want to see more evidence that inflation is moving toward the central bank's 2% target, while also hoping for greater clarity on President Donald Trump's economic plans.

Cleveland Federal Reserve President Mester noted that the effects of last year's rate cuts on the economy may take some time to materialize, adding that "an acceleration in economic activity could slow or hinder the process of inflation decline." She also pointed out that rates may be "close to neutral," meaning that at this policy stance, rates neither slow down nor stimulate economic growth.

Her remarks sharply contrast with those of Federal Reserve Chairman Jerome Powell last month, who stated that after last year's rate cuts, rates still "have substantial constraints."

Mester previously indicated that rates should "remain unchanged for a period of time" while officials wait for more progress on inflation. The Cleveland Fed President voted against the decision to cut rates by 25 basis points in December, believing it was more appropriate to maintain stable rates before further easing price pressures.

The latest data on the inflation indicator closely monitored by the Federal Reserve—the Personal Consumption Expenditures Price Index—will be released on Friday. Officials will hold their next policy meeting on March 18-19

Financial Risks

Harmark devoted a significant portion of her speech to discussing topics related to financial stability, including hedge fund leverage, the growth of non-bank lending (including so-called private credit), and the U.S. Treasury market.

When discussing private credit, she emphasized its lack of transparency, its expanding scale, and its connections to insurance and pension funds.

Harmark pointed out, "It is worth considering what impacts significant losses suffered by pension and insurance companies during an economic downturn may have, and whether these risks will spill over into the broader financial system. We need to think about the broader consequences of regulatory provisions that drive lending activities outside the banking system."

She also criticized the banking regulations implemented since the 2007-2008 financial crisis, which seem to hinder market-making activities in the $28 trillion U.S. Treasury market, thereby reducing market liquidity during the crisis.

She stated, "Recent research suggests that the growth potential of the U.S. Treasury market may exceed the ability of dealers to effectively and safely mediate transactions in the cash and repo markets. This situation means we need to weigh the costs and benefits of dealer constraints, such as the Supplementary Leverage Ratio (SLR) and the Tier 1 Leverage Ratio."