FED SHOULD RAISE KEY RATE A FULL POINT BY AUGUST, MESTER SAYS

The U.S. Federal Reserve should raise its benchmark federal funds interest rate by a half-point in June and again in July, Loretta Mester, president of the Federal Reserve Bank of Cleveland, urged in a 13 May speech.

“Given economic conditions, ongoing increases in the fed funds rate are called for,” she said.

Mester is a voting member of the Fed’s Open Market Committee, which sets the fed funds rate.

Raising the rate a full point would bring it to “neutral,” Mester said, the point at which the rate neither stimulates nor hobbles the economy.

“If, by the September [committee] meeting, the monthly readings on inflation provide compelling evidence that inflation is moving down, then the pace of rate increases could slow,” she said.

However, “if inflation has failed to moderate, then a faster pace of rate increases may be necessary,” she added.

“I will need to see several months of sustained downward monthly readings of inflation before I conclude that inflation has peaked,” she emphasized.

Mester also noted that “the current pace of wage increases is inconsistent with maintaining price stability,” raising the specter of a wage-price spiral, in which the two drive each other higher.

TREND FORECAST: The Fed will raise its key rate by a half-point in June and again at its meeting in July. 

However, that will not make an appreciable dent in inflation. The loss of China’s production in March, April, and May this year will not recover by July, leaving the world still short of essential goods. Thus, it is a simple supply and demand issue: The higher the demand and the less the supply… the higher the price. 

Without a dramatic change in consumer behavior, which we have yet to see in the face of rampant inflation, the Fed will raise its rate by at least a half-point at its September meeting, if not before.

Even then, prices that inflation has boosted are likely to stay there. History shows that, with the exception of oil and its products, once rents and other prices rise, they remain at that elevated level.