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  • by Smriti Mathur
  • Mar 05, 2023
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Fed’s Mester Says She Has Hope Inflation Can Be Brought Down Without A Recession

 

Hold on to your hats, folks, because the winds of change are blowing in the world of economics! In a recent statement, Federal Reserve Bank of Cleveland President Loretta Mester expressed optimism about the current state of the US economy. Despite concerns over rising inflation, Mester stated that she believes it's possible to bring down inflation without resorting to a recession. With the economy on everyone's mind these days, her words have struck a hopeful chord among many.

 

Federal Reserve Bank of Cleveland President Loretta Mester has just made some headlines with her bold statement about interest rates and inflation. According to Mester, the only way to get inflation back down to manageable levels is by continuing to raise interest rates. It's a move that could have far-reaching consequences for the economy, and one that Mester herself seems to be taking seriously. Just recently, she made waves by pushing for a half percentage point rate hike at the last meeting, but now she's not sure if she'll push for that again. Whatever happens, it's clear that Mester is not afraid to shake things up in the name of a stronger, more stable economy.

In an exclusive interview with CNBC, Mester revealed that she believes interest rates need to keep moving higher to get inflation back to acceptable levels. According to Mester, the central bank's benchmark interest rate will have to rise above 5% and remain there for a while to make a significant impact.

Currently, the fed funds rate, which sets the level that banks charge each other for overnight borrowing, is in a target range of 4.5%-4.75%. However, Mester believes that the economy needs a more substantial boost to get inflation under control, which is currently above the Federal Reserve's 2% target. "We'll figure out how much above. That's going to depend on how the economy evolves over time. But I do think we have to be somewhat above 5% and hold there for a time in order to get inflation on a sustainable downward path to 2%," said Mester.

 

The implications of Mester's statement are significant and could have far-reaching consequences for the US economy. Raising interest rates could affect many forms of consumer debt, from mortgages to credit cards, and have an impact on the stock market as well. While Mester acknowledges that the decision on how high to raise interest rates will depend on how the economy evolves, her words suggest that she's ready to take a bold approach to steer the economy towards a sustainable path.

Mester's bold stance on interest rates is not new, as she previously pushed for a half-percentage point rate hike at the last meeting. However, she's now unsure if she'll push for that again. It's clear, though, that Mester is committed to finding a solution to inflation that will ensure a strong and stable economy for the future. As we wait to see how this situation evolves, there's no doubt that all eyes will be on Mester and the Federal Reserve as they work towards securing a brighter economic future for us all.

In a recent revelation that has caused a stir in the financial world, Mester admitted that she was among a small group of Fed officials who advocated for a half-percentage point rate hike at the Jan. 31-Feb. 1 Federal Open Market Committee meeting, rather than the quarter-point move the panel ultimately approved.

 

As a nonvoter this year on the rate-setting FOMC, Mester doesn't have the power to directly impact rate decisions. However, she still has significant input into the decision-making process, and her opinions are highly regarded by her peers. When asked if she would push for a half-point increase when the committee meets again in March, Mester was non-committal, saying "I don't prejudge. That's a tactical decision that we make at the meeting."

 

Mester's approach to the economy is one that values careful consideration and measured action. She is known for her thoughtful, data-driven approach to decision-making, and her willingness to speak her mind has earned her a reputation as a leading voice in the world of economics.

While Mester's future moves on interest rates remain unclear, there's no doubt that the eyes of the financial world will be on her as she continues to provide valuable insights into the state of the US economy. As we wait to see how this situation evolves, one thing is certain: Loretta Mester's bold economic stances will continue to make headlines and shape the conversation around the future of the US economy.

 

In the world of economics, achieving the delicate balance between inflation and economic growth is a constant challenge. Many economists have expressed doubts about whether the Federal Reserve can successfully achieve its inflation goals without pushing the economy into a recession. According to the Atlanta Fed, GDP grew at a rate of 2.7% in the fourth quarter of 2022 and is tracking at about a 2.5% rate in the first quarter of 2023. This has led some to question whether the Fed's inflation goals are even achievable.

 

Despite these concerns, Cleveland Federal Reserve President Loretta Mester remains optimistic that the Fed can achieve its goals without harming the labor market. In a recent interview, Mester acknowledged that a contraction in the economy is a possibility, but she believes that it wouldn't be severe. Moreover, she expressed her hope that the Fed can achieve its goals without crushing a labor market that has proven to be surprisingly resilient despite all the rate increases.

"I do think that in this labor market, we can have both. We can have a healthy labor market and we can get back to price stability," Mester said. "But I also think it's really important to know that if we want to sustain healthy labor markets over time, we have to get back to price stability."

As she prepared to speak at a monetary policy conference in New York, Mester's optimism and careful consideration of the issues at hand underscored her reputation as a leading voice in the world of economics. While the challenges ahead are certainly daunting, Mester's measured approach and her commitment to finding solutions that benefit both the economy and the labor market will undoubtedly be key to charting a successful path forward.

 

Statistics Proves It All!

The Federal Reserve has been grappling with high inflation for several months, and Cleveland Federal Reserve President Loretta Mester believes that interest rates will need to keep rising to get inflation back to acceptable levels. In a recent CNBC interview, Mester said she sees the central bank's benchmark interest rate rising above 5% and staying there for a while. Currently, the fed funds rate is in a target range of 4.5%-4.75%. Mester believes that bringing interest rates above 5% and holding them there for a time will help get inflation on a sustainable downward path to 2%. While Mester is a nonvoter this year on the rate-setting Federal Open Market Committee (FOMC), she still has input into decisions. She said she's not sure yet whether she will push for a half-point increase when the committee meets again in March.

Many economists have expressed doubts about whether the Fed can achieve its inflation goal without harming economic growth. GDP grew at a rate of 2.7% in the fourth quarter of 2022, and is tracking at about a 2.5% rate in the first quarter of 2023, according to the Atlanta Fed. However, Mester thinks that if the economy does contract, it won't be a severe downturn. She also expressed hope that the Fed can achieve its goal without crushing a labor market that has been surprisingly resilient despite all the rate increases. She believes that in this labor market, it's possible to have both a healthy labor market and a return to price stability. However, she also emphasized the importance of getting back to price stability if the Fed wants to sustain healthy labor markets over time.

The Federal Reserve's inflation goal is to achieve an average inflation rate of 2% over time. However, the inflation rate has been running below this target for several years. In January 2023, the inflation rate was 6.3%, well above the Fed's target. While some of this increase was due to temporary factors like supply chain disruptions and labor shortages, the Fed is still concerned about the possibility of sustained inflation. The Fed has been gradually raising interest rates in an effort to cool off the economy and bring inflation back down to target levels. However, some economists worry that continued interest rate hikes could eventually lead to a slowdown in hiring and wage growth, which could in turn harm consumer spending and overall economic activity.

Mester was scheduled to speak later on the same day at a monetary policy conference in New York, where she was expected to provide further insights into the Fed's thinking on interest rates and inflation. The Fed will meet again in March to decide on the future course of interest rates. While some analysts expect another rate hike, others believe that the Fed may take a more cautious approach given the uncertain economic environment. Overall, the Fed faces a delicate balancing act as it tries to achieve its inflation goal while also avoiding a recession and supporting a strong labor market.

 

What’s The Say Of Research Conducted So Far?

The question of whether the Federal Reserve can tackle inflation without causing a recession has been a topic of much debate in recent times. A new research paper by a group of leading economists suggests that an "immaculate disinflation" is unlikely, and that the Fed may need to brace for a recession.

 

The Fed has been raising interest rates over the past few years in response to the high levels of inflation. This move is aimed at slowing down the economy, which is expected to reduce price increases. However, the higher interest rates also make borrowing more expensive for businesses and individuals, which can slow down economic growth.

The new research paper suggests that achieving "immaculate disinflation" - that is, lowering inflation without causing a recession - is unprecedented. This conclusion is based on an analysis of inflation episodes in advanced economies over the past century. The paper suggests that a recession is likely to occur when the Fed raises interest rates to combat inflation.

The three Fed officials who spoke at the monetary policy conference in New York addressed the paper's conclusions. They acknowledged the challenges in achieving an "immaculate disinflation" but emphasized that it is important to aim for low inflation. One of the officials, Cleveland Federal Reserve President Loretta Mester, said that a recession is not inevitable and that the Fed can navigate the situation carefully to minimize the impact on the economy.

The debate around inflation and interest rates is ongoing, and the new research paper adds to the conversation. As the Fed continues to grapple with high levels of inflation, it remains to be seen how it will balance the need to bring down prices with the risk of a recession.

 

As the Federal Reserve continues to grapple with soaring inflation, questions loom large about whether it can raise interest rates and tame the country's worst bout of price increases without plunging the economy into a recession. A recent research paper by a group of prominent economists casts doubt on the feasibility of this "immaculate disinflation." According to the paper, which was discussed by three Fed officials at a conference on monetary policy in New York, there has never been a successful instance of eradicating high inflation without significant economic sacrifices.

The Fed typically responds to surging inflation by increasing interest rates in an effort to curb price increases and cool the economy. But this strategy can backfire, leading to steadily more expensive loans that ultimately hamper growth and even trigger a recession. The researchers who authored the paper analyzed 16 episodes of central banks raising borrowing costs to tackle inflation since 1950 in countries like the US, Canada, Germany, and the UK. In every single case, a recession ensued.

According to the paper, "There is no post-1950 precedent for a sizable ... disinflation that does not entail substantial economic sacrifice or recession." The researchers included Stephen Cecchetti, a professor at Brandeis University and a former research director at the Federal Reserve Bank of New York; Michael Feroli, chief U.S. economist at JPMorgan and a former Fed staffer; Peter Hooper, vice chair of research at Deutsche Bank, and Frederic Mishkin, a former Federal Reserve governor.

 

These findings present a significant challenge to the Fed's current policy approach and suggest that policymakers will have to make difficult choices to achieve their inflation-fighting goals without triggering an economic downturn. The paper's authors note that even if the Fed manages to bring inflation under control, it will likely require substantial sacrifices in terms of growth and employment. These trade-offs are likely to become more apparent in the coming months as the Fed grapples with its next steps and their potential impact on the broader economy.

 

The economists' paper raises a host of difficult questions for policymakers and market participants alike. How high will the Fed have to raise interest rates to get inflation under control? Can the economy withstand such a move without slipping into recession? And what will be the long-term implications for growth and employment? As the Fed continues to navigate this challenging landscape, investors and businesses will be closely monitoring its decisions and assessing the potential risks and opportunities.

In a new research paper, a group of leading economists have raised the question of whether the Federal Reserve can keep raising interest rates without causing a recession. The paper concluded that such an "immaculate disinflation" has never been achieved before, despite numerous attempts to fight inflation by raising interest rates.

 

For the past two years, inflation has been soaring, leading the Fed to respond by raising interest rates in an effort to cool the economy and slow price increases. However, if inflation pressures persist, ever-higher rates may be required to tame it. This can result in steadily more expensive loans, leading companies to cancel new ventures and cut jobs, and consumers to reduce spending. All of this can contribute to a recipe for recession.

The research paper reviewed 16 episodes since 1950 when a central bank like the Fed raised the cost of borrowing to fight inflation in the United States, Canada, Germany, and the United Kingdom. In each case, a recession resulted. The paper was written by a group of economists, including Stephen Cecchetti, a professor at Brandeis University and a former research director at the Federal Reserve Bank of New York; Michael Feroli, chief U.S. economist at JPMorgan and a former Fed staffer; Peter Hooper, vice chair of research at Deutsche Bank, and Frederic Mishkin, a former Federal Reserve governor.

 

Despite the paper's conclusions, some Fed officials remain hopeful that a recession can be avoided. Philip Jefferson, a member of the Fed's Board of Governors, suggested that the pandemic has so disrupted the economy that historical patterns are less reliable as a guide this time. Nevertheless, the perception in financial markets and among economists is that the Fed will likely have to boost interest rates even higher than previously estimated, following a government report that the Fed's preferred inflation gauge accelerated in January after several months of declines.

 

As the US economy continues to grapple with the worst bout of inflation in 40 years, a new research paper suggests that the Federal Reserve may not be able to raise interest rates enough to defeat it without causing a recession. The paper, authored by a group of leading economists including former Federal Reserve governors and bank executives, highlights that the so-called “immaculate disinflation” has never happened before. In each of the 16 episodes of high inflation since 1950 when central banks raised borrowing costs, a recession ensued.

This is a growing concern for the financial markets and economists alike as the Fed may need to increase interest rates higher than previously estimated. The Fed has already raised its key short-term rate eight times over the past year, however, inflation continues to soar. In January, the Fed’s preferred inflation gauge accelerated, jumping 0.6% from December to January, the biggest monthly increase since June.

While some Fed officials, including Philip Jefferson, suggest that a recession may not be inevitable, a view echoed by Fed Chair Jerome Powell, Loretta Mester, President of the Federal Reserve Bank of Cleveland, came closer to accepting the paper's findings. Mester believes that the risks of continued high inflation are significant, and recent research suggests that inflation could be more persistent than currently anticipated.

 

While Susan Collins, President of the Boston Fed, remains optimistic that a recession could be avoided even as the Fed seeks to conquer inflation with higher rates, she also acknowledges that there are many risks and uncertainties surrounding the economy. The current situation is different from past episodes of high inflation in at least four ways, according to Jefferson, including the “unprecedented” disruption to supply chains since the pandemic, the decline in the number of people working or looking for work, the Fed's increased credibility as an inflation-fighter, and the fact that the Fed has moved forcefully to fight inflation with eight rate hikes in the past year.

The possibility of the Federal Reserve needing to raise interest rates even higher than previously estimated to combat inflation, which has been rising faster than anticipated. The paper being discussed suggests that inflation may be more persistent than currently anticipated and that the Fed may need to keep tightening credit and raising rates for an extended period to combat it. While some economists remain optimistic that a recession can be avoided, the possibility of higher rates and continued inflation raises concerns that a recession could become more likely later this year.

The researchers predict that if the Fed raises its benchmark rate to between 5.2% and 5.5%, the unemployment rate could rise to 5.1%, while inflation could fall as low as 2.9%, but inflation would still exceed the Fed's target, suggesting that rates may need to be raised even further. While some economists point to historical examples of the Fed achieving a soft landing in the past, the paper notes that inflation levels in those cases were not nearly as severe as they were last year, suggesting that the Fed may face a more difficult challenge this time around.

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