Written by Ann Sapphire
(Reuters) – Cleveland Fed President Loretta Meester said on Monday that with inflation “unacceptably high,” the Fed should raise interest rates higher and maintain restrictive policy for some time — and if something is wrong to be done, It is better that the Fed do more than do too little.
“When there is uncertainty, it can be better for policy makers to act more aggressively because aggressive and precautionary measures can actually prevent the worst outcomes from happening,” Meester said in notes prepared for delivery to MIT.
Meester said she would be “very cautious” about assessing inflation, and would need to see several months of decline in monthly readings to be convinced that inflation has peaked. Similarly, she said she would “watch out for complacency” about long-term inflation expectations which have eased a bit recently but may not, she said, be as stable as hoped and could rise again.
She said policymakers faced with uncertainty about inflation expectations should take the risk of setting policy that is too strict and not too loose.
“Research suggests that assuming that longer-term inflation expectations are well-proved at the level consistent with price stability when in fact they are not a more costly mistake to the economy than assuming that they are not well-proved when in fact they are,” Meester said.
The Fed last week raised its policy rate to 3%-3.25% in its third increase of 75 basis points in many meetings.
Policymakers have signaled the possibility of another similar increase in volume at their next meeting in November, with more increases in subsequent months, as the US central bank seeks to raise borrowing costs enough to nibble growth and cut inflation three times its target. Even at the expense of the high unemployment rate.
“More increases in our policy rate will be needed,” Meester said. “In order to put inflation on a sustainable downward path to 2%, monetary policy needs to be in a restrictive position, with real interest rates moving into positive territory and staying there for some time.”