Michael S. Derby
(Reuters) – Cleveland Federal Reserve Bank President Loretta Mester said on Thursday she did not think U.S. financial markets would be in trouble, This would change the central bank’s actions to lower interest rates. Raising interest rates leads to very high levels of inflation.
While “no one knows for sure” if there is a big problem lurking in the financial sector right now, “so far we haven’t seen that kind of market failure, even if what’s happening is currently global Market, we haven’t seen that in the U.S. market,” Mester said in an interview with CNBC.
Mester spoke about market conditions in a very volatile global situation. She acknowledged that the Bank of England’s bond purchases this week to stabilize markets appeared to be at odds with its work to reduce inflation.
The Bank of England’s actions seemed “a bit incoherent because at the same time they were talking about raising interest rates,” Mester said. But she added that the BoE’s approach had “good reasons”, saying “it’s very important that markets work because if they don’t work, you won’t be able to achieve any monetary policy objectives.”
In the Commonwealth Mester, who votes on the FOMC’s rate setting, said she still sees inflation as the top issue facing the economy, which means the central bank needs to keep raising rates, now ranging from the federal funds target rate from 3.25%-3.25% increased to more than 4%.
The Federal Reserve fears that its aggressive rate hikes aimed at bringing inflation down from 40 year highs will tip the economy into recession. Financial markets were also broadly stressed and suffered heavy losses, with many observers worried that the Fed’s actions, coupled with interest rate hikes by other major central banks, could trigger market failures.
Mester said she does not currently see a reason to slow rate hikes. She noted that at last week’s FOMC meeting, officials set a path for the federal funds target rate to reach 4.6 percent next year, and said she expects the central bank may have to go further.
“I’m probably a little above the median path because I see a more protracted inflation process,” Mester said. A federal funds rate above 4 percent is important to help reduce inflation, she said.
Mester also said that job market demand continues to outstrip supply. She also said a strong dollar would help reduce U.S. inflation.