Cleveland Fed President Warns of Persistent Inflation

Cleveland Federal Reserve President Loretta Mester said on Tuesday that current interest rates are only 'modestly' restrictive and that officials may keep borrowing costs steady for some time. Mester added that despite recent progress, the Fed still has 'some ways to go' to reach its 2% inflation target. She also noted that official data is lagging and may not fully capture current dynamics, including the risk of rising oil prices potentially fueling inflation expectations.

'The most likely case is that policy will remain on hold for quite some time before the committee begins to make very modest rate cuts to move policy back to neutral,' Mester said in prepared remarks for a conference in London.

The Fed Waits and Observes

Federal Reserve officials held interest rates steady at their June meeting for the fourth consecutive time to allow more time to observe how President Trump’s tariffs and other policies will affect inflation and growth. Tensions in the Middle East also add to the risks to the global economy.

The latest projections released at the June meeting showed that Fed policymakers still expect two rate cuts this year, according to median projections. However, the projections also showed some divisions, with seven officials expecting no rate cuts at all this year.

Mester stated that the resilience of the economy suggests that the risk of keeping interest rates steady is low. She said she does not see weakness in the economy warranting a rate cut, but is 'staying alert to that possibility.'

The Cleveland Fed president also said that interest rates may be close to a neutral level, the level at which the Fed is neither stimulating nor slowing the economy. These remarks align with the overall cautious approach the Fed is taking amid current economic uncertainty.

Diverging Views Among Fed Officials

Officials who have spoken since that meeting have also expressed a range of views on the timing of any action. Fed Governor and Vice Chair for Supervision Michelle Bowman, both Trump appointees, saw it as possibly appropriate to begin cutting rates as early as July if inflation remains under control. However, San Francisco Fed President Mary Daly suggested that a rate cut in the fall is a more likely possibility.

Federal Reserve Chairman Jerome Powell reiterated in prepared testimony before the House Financial Services Committee: 'We are in a good position to wait and learn more about the likely path of the economy before considering any adjustments to our policy stance.'

Powell said last week that he expects tariffs to lead to higher prices and hopes to see some of their impact show up in economic data before officials adjust interest rates.

Additional Analysis:

These statements show that the Federal Reserve is carefully balancing the risk of inflation with the stability of economic growth. They are closely monitoring economic data and may wait some time before taking any action on interest rates.