By Greg Robb
It is going to be difficult for Federal Reserve officials to discern signal from noise about inflation given all the conflicting supply-and-demand factors influencing prices, Cleveland Fed President Loretta Mester said Monday.
“We have to understand that inflation is going to be continuing to be hard to predict,” Mester said, in a talk at the Massachusetts Institute of Technology.
The Cleveland Fed president said the Fed hasn’t done a very good job of predicting inflation, and it is going to remain challenging.
She mentioned the war in Ukraine, the global economic outlook and stresses in China’s economy as a few factors of uncertainty. In addition, there is consumer and business sentiment, and labor force and other supply factors.
Mester said she was going to be “very cautious” before declaring victory over inflation, which remains at the highest levels in 40 years.
“We can’t have wishful thinking replace really compelling evidence,” Mester said. “So before I conclude that inflation has peaked, I will need to see several months of declines in the month-over-month readings.”
The Fed surprised the market last week by penciling in a terminal rate in the range of 4.5%-4.75% sometime next year.
The Cleveland Fed president backed a higher and longer path for interest rates.
“We’re just going to have to have rates up, and rates are going to be held higher for longer than we thought previously,” Mester said. “We can’t avoid pain. We’re going to have pain and this is a very painful situation.”
But if the Fed doesn’t take “decisive action” to get inflation down and to get inflation expectations firmly anchored, “the costs would be very high,” she added.
Stocks /zigman2/quotes/210598065/realtime DJIA -0.56% /zigman2/quotes/210599714/realtime SPX -0.09% closed lower on Monday on concerns that the Fed rate hikes might tip the economy into recession. The yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -4.78% rose to 3.9%.