Cleveland Fed President Loretta Mester said Tuesday that she would be "comfortable" with 0.50% interest rate increases at the Fed’s next two meetings, as the central bank continues to fight high inflation.
“We have to get inflation under control, that means moving interest rates up,” Mester told Yahoo Finance on the sidelines of a conference in Florida.
Mester suggested she does not currently favor moving interest rates in increments larger than 0.50%, although she emphasized that the Fed will be flexible.
“There’s always something on the table,” Mester said.
Last week, the Fed moved to raise short-term interest rates by 0.50% (to a target range between 0.75% and 1.00%). The central bank has not hiked rates by more than 0.25% in a single meeting since May 2000.
Despite market chatter that high inflation would push the Fed into 0.75% moves at a time, Fed Chair Jerome Powell’s remarks appear to rule out those outsized moves — at least for now.
Although inflation is pacing at growth rates unseen since the early 1980s, the Fed does not want to abruptly raise interest rates so quickly that economic activity craters into a recession.
Mester, who similarly showed a lack of appetite for a 0.75% hike at the moment, said it is not her base case scenario for the Fed to tilt the U.S. economy into a recession. But turmoil in financial markets has shown it will be a difficult tightrope for the Fed to walk.
“There’s no doubt that the challenge for the Fed is a large one. I think things will be bumpy,” Mester said.
The Cleveland Fed president also chimed in on the central bank's plan to shrink its nearly $9 trillion in asset holdings. The Fed outlined a plan last week to allow up to $95 billion a month (in U.S. Treasuries and agency mortgage-backed securities) to roll off of its balance sheet. Mester said she could see a situation where the Fed may want to speed up that process by actively selling more MBS.
Mester is a voting member of this year’s policy-setting Federal Open Market Committee. The next Fed decision is scheduled for June 15.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.