The following is a transcript of an interview with Loretta Mester, President and CEO of the Federal Reserve Bank of Cleveland, which aired on “Face the Nation” on Sunday, June 19, 2022.
Margaret Brennan: Members of the Federal Reserve’s Open Market Committee: There are a total of 12 people voting on whether to adjust interest rates or how much. Loretta Mester is one of those people and she joins us this morning from Philadelphia. Good morning to you
Loretta Mester: Good morning, Margaret. Nice to meet you
Margaret Brennan: I’m glad to have you back. As you know, this persistent high inflation is surprising to Federal Reserve officials. Chairman- Chairman Jerome Powell, I’m sorry, said a lot this week, and so he said there was this unusually large interest rate increase of 75 basis points. He hopes to do the same in the next few weeks. What will change that plan for you?
MESTER: Well, what we’re seeing is trying to bring our interest rates back to normal so that we can stem the tide of demand in the economy and bring it back so that we can relieve some of that. Inflationary pressures. So we are looking for month-to-month changes in inflation rates to get some really good evidence that we first saw inflation stabilize and then start moving down. It will take some time for inflation to fall to 2 percent. But what we are looking for is that we can see some moderation in demand, which has become incredibly strong. Bringing it back in line with the supply side, which, of course, you know, is limited, easing some of the price pressures, lowering inflation and getting back to the sustainable path of 2%, which is our inflation target. So what we’re looking at is what’s happening in the monthly numbers. And frankly, the May CPI report was basically bad across the board, we didn’t really see inflation stabilize. In fact, some measures actually looked worse in May than in April. And so that was part of the calculus of why the rate hike was a little higher than usual at our meeting last week.
Margaret Brennan: Well, one person disagreed: Esther George of the Kansas City Fed. She said she thought the Fed was moving too fast. He argued that significant and sudden changes could disrupt households and small businesses. Why is she wrong, and are you convinced that these dramatic increases will not trigger a recession?
MESTER: All right. Well, I can never say the wrong thing about Esther. This is an alternative approach. We had indicated that we thought 50 would be appropriate, but we got new data. And we also say that in this period of uncertainty, we really need to be agile. And when we see data moving in the wrong direction, or constantly moving in the wrong direction, and knowing that inflation expectations are rising, not in the short term, but in the long term, I was convinced. It was appropriate to move the clip larger than we initially indicated.
Margaret Brennan: And you’ll expect that next time.
MESTER: What are we looking at, is demand coming in well with mediation and supply? And is inflation going down? That is going to be the key here. We need to look at the compelling evidence that inflation is moving towards our goal.
Margaret Brennan: Hmmm. Well, Treasury Secretary Janet Yellen, you’ve known her since the time the Federal Reserve ran. She said the economy would slow down this morning. How late are you expecting it to be? Are you predicting a recession?
MESTER: So I’m not predicting a recession. If you look at the forecasts presented and released by all the participants in the FOMC meeting earlier this week, you will see that we have the trend slightly below the growth and we have the unemployment rate rising above. A little And that’s fine. Right? That being the case, we want to see some slowdown in demand to get it in line with supply. But there are other things that are happening years later. For example, we have already seen that households have actually relocated some of their expenses. Instead of spending on goods, which was actually a big part of the cost of getting out of the epidemic, the height of the epidemic, when the economy reopened, was on more services. This is going to help ease some of the upward pressure on commodity prices so other parts of the economy will run and so are we at interest rates. We have already seen that interest rates have affected the housing sector, where the housing sector is retreating from the heights it has seen. So we want to see some moderation in demand. Where we are going to navigate, however, is setting our policy rates, our interest rates, so that we can maintain a healthy economy and healthy labor markets during this period. But there is a lot of uncertainty. We are going to be very cautious and agile in this approach of withdrawing this very amicable monetary policy. That’s the decent thing to do, and it should end there.
Margaret Brennan: Right. The Fed Chair, however, was very clear that there are things that are out of your control. Monetary policy cannot solve this problem. He said the price of gas was out of control. War in Ukraine, COVID. So for people at home, does that mean they have to assume that their food and energy costs will stay high for another year or two?
MESTER: So I agree with Chair Powell. That’s right. The way monetary policy works is in favor of the demands of the economy. We can slow down some of the demand that supply is currently where it is. But as we move forward, we should expect to see some moderation and some improvement in the supply side. Extremely uncertain, I agree. Monetary policy cannot control this. What can we do with our tools to get this inflation problem? And you said, it’s at a 40-year high. We need to find the right monetary policy to deal with the high demand and high demand that is really driving the price pressure. That we can do with our equipment. And we’re committed to doing that and keeping inflation – moving it back to 2%. But the reason it takes so long is that we have to get that supply side back and a good balance. And so it’s not going to happen immediately that we see 2% inflation and it could take a few years, but it’s moving down.
Margaret Brennan: A few years. I mean, the other hard thing to measure is people’s faith. Right? And when they see by the administration, by the Fed, that inflation was temporary, they can say that people were wrong. Right? Officials have misunderstood. Gary Conn, former chairman of Goldman Sachs, a former Trump economic adviser, said the Fed was clearly behind the curve, apparently slowing rates. And now the runway for soft landings is much shorter and narrower. You are not predicting a recession, but you must acknowledge that mistakes have been made and the risk is increasing.
MESTER: All right. The risk of a recession is increasing, in part because monetary policy could have given it a little earlier. We are now doing so by raising interest rates. But of course, there are many other things happening. The situation in Ukraine, which is a tragedy, in fact, you know, because of the high price of oil, everyone is feeling the effects of the price of petrol and the high price. So other things were shifting to the supply side as well. Of course the supply terms will be longer than I expected. The businesses we talked about in the Cleveland district thought there would be significant improvements. However, you know, like last year, we didn’t get that. Now they do not see much meaningful improvement. So, again, other things are happening. That’s right. What I mean, though, is that we at the Fed are very committed to using the tools at our disposal to control this inflation and bring it back to 2%. This is the first challenge of the economy right now.
Margaret Brennan: That’s right.
MESTER: And I believe that if we want to maintain healthy labor markets it is necessary to do so. I don’t see it as a trade-off.
Margaret Brennan: All right. Well, this is a big economic and political challenge. We will continue to cover it here. Thank you. Loretta Mester. We’ll be back in a minute.