She said it…Fed’s Mester doesn’t see ‘compelling case’ for half percentage point rate hike in March

The Federal Reserve doesn’t have to start hiking its policy interest rate with a big 50 basis point move, said Cleveland Fed President Loretta Mester on Wednesday. In a virtual address to the European Economics and Financial Center in London, Mester made clear that she supports rate hikes this year, beginning in at the next meeting on March 16, given the high inflation readings and strong labor market.

“The task before us is to remove accommodation at the pace necessary to bring inflation under control,” Mester said.

Some on Wall Street have raised the possibility that the Fed would raise rates in March by 50 basis points, but Mester said she didn’t see a “compelling case” for such a large move. “We’ve got to be a little careful. Because…even though you can well telegraph sort of what’s coming, when you take the that first action, you know there’s going to be a reaction,” she said.

Looking at the terminal rate — where the Fed’s policy rate rise will be the last one in the rate hiking cycle — Mester said that with the economy doing so strongly, the Fed might have to raise rates above neutral – which is estimated at a 2.5% policy rate.

Moving above 2.5% would mean that policy is aiming to restrict economic growth. This is not the “soft landing” scenario for the economy envisioned by Fed Chairman Jerome Powell at his press conference after the last Fed meeting in January.

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