The U.S. Federal Reserve should keep the base rate to above 5 percent in 2023 to get inflation on a downward path to 2 percent, according to Loretta Mester, president and chief executive officer at the Federal Reserve Bank of Cleveland.

“Inflation has been running near 40-year highs over the past year and it is broad based,” Mester said, in an interview with Maeil Business Newspaper last week. “In order to get inflation on a sustainable downward path to 2 percent, policy will need to be sufficiently restrictive and remain there for some time.”

Her remarks come as the market has raised expectations that the U.S. Fed could bring down the base rate this year from 4.25~4.5 percent, the highest level since 2007.

The consumer price index (CPI) in the U.S. has slowed to 6.5 percent to a 14-month low in December but “it is too soon to say that inflation is on a sustainable downward path to 2 percent.”

“I believe that we will need further policy rate increases to ensure that that is the case,” she said.

Q. The U.S. Fed raised interest rates rapidly in 2022. How effective do you think it was in curbing inflation?

A. The Federal Reserve took decisive actions to reduce monetary policy accommodations last year, raising the target range of its policy rate, the federal funds rate, by 425 basis points to 4.25~4.50 percent. These actions are tightening overall financial conditions and helping to slow aggregate demand, bringing it into better balance with supply, thereby alleviating price pressures. With inflation still unacceptably high and persistent, further rate increases will be needed to put inflation on a sustainable downward path to 2 percent.

Q. Is the target inflation rate of 2 percent achievable in the long run?

The Fed is committed to bringing inflation down to our long-run goal of 2 percent in a timely way and we will succeed. As is always the case when we are transitioning monetary policy, the Fed will need to continue to weigh the risks of tightening too much against the risks of tightening too little. Tightening too much would slow the economy more than necessary and entail higher costs than needed to return to price stability. Tightening too little would allow high inflation to persist, with short- and long-run economic consequences, and necessitate a much more costly journey back to price stability. Given that over the past year inflation proved to be more persistent that expected and that continued high inflation imposes significant costs, I currently view the larger risks as coming from tightening too little. We will be diligent in setting our monetary policy to achieve price stability and judicious in balancing the risks so as to minimize the pain of the journey.



Q. Do you think the U.S. interest rate should stay above 5 percent in 2023?

A. Inflation has been running near 40-year highs over the past year and it is broad based. In order to get inflation on a sustainable downward path to 2 percent, policy will need to be sufficiently restrictive and remain there for some time. Given the level of persistence of underlying inflation, I anticipate that that means the fed funds rate will need to move above 5 percent in the early part of 2023 and remain there throughout the year. This will help keep longer-term inflation expectations anchored at levels consistent with 2 percent inflation, which will help ensure that inflation returns to our longer-run goal in a timely way.

Q. Do you think the U.S. inflation has reached its peak and entered a downward trend?

A. We have gotten some welcome news on inflation in the recent monthly inflation reports. I expect inflation to move down in 2023, but I think it is too soon to say that inflation is on a sustainable downward path to 2 percent and I believe that we will need further policy rate increases to ensure that that is the case.

Q. How would you assess the U.S. economy and what is the probability of a global recession in 2023?

A. My assessment of the economy and appropriate monetary policy will be informed by a variety of incoming information and data, including official statistics, survey evidence and reports from our business, labor market, and community contacts. … I am not projecting a recession in the U.S. However, I do expect growth to be well below trend over the next two years. In a low-growth economy, I recognize that a shock could result in growth turning negative for a time in the U.S.

Q. Would the U.S. economy make a soft landing?

A. Tighter monetary policy will help to slow aggregate demand and lead to growth in the U.S. that is well below trend this year and next. However, once inflation is put on a sustained downward trend to 2 percent, I anticipate that growth will return to a trend rate of about 2 percent.

Q. Under what conditions will the Fed turn to lower rather than raise the interest rate?

A. The Fed has expeditiously raised the fed funds rate, which is at the edge of restrictive territory. Now we are in the process of making sure that policy becomes sufficiently restrictive and is kept sufficiently restrictive in order to put inflation on a sustainable downward path to 2 percent. … We will not keep raising interest rates until the point at which inflation is back to 2 percent. However, we are not close to a discussion of when to ease policy. Instead, we are now in the phase of determining how much higher the fed funds rate needs to go and for how long it will need to be maintained at that level in order to achieve our monetary policy goals.

By Kang Gye-man and Lee Eun-joo

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