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The Fed: Mester says Fed needs to keep interest rates higher for longer to cool inflation

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The president of the Cleveland Federal Reserve welcomed “some easing” in U.S. inflation, but she also said the central bank needs to keep raising interest rates until price pressures dissipate more rapidly.

“Given that inflation has consistently proven to be more persistent than expected and there are significant costs of continued high inflation, I currently view the larger risks as coming from tightening too little,” said Loretta Mester in a speech at Princeton University.

Mester did not indicate whether she would back a smaller increase in interest rates when senior Fed officials hold their next big meeting in December.

The Fed has raised a key short-term U.S. interest rate by three-quarters of a point at its last four meetings, pushing it to a top end of 4% from near zero in the spring. The goal is to try to slow the economy enough to bring inflation down.

The annual rate of inflation has come off a rolling boil, slowing to 7.7% in October from a pandemic peak of 9.1% in the summer, according to the latest consumer price index. The slowdown in inflation sent stocks
DJIA,
+2.63%

SPX,
+4.25%

soaring in Thursday trades.

Inflation it still about four times higher compared to pre-pandemic levels, however.

“If you look at inflation, it’s still unacceptably high,” Mester said. Other Fed officials also offered similarly tough remarks on Thursday.

The Cleveland Fed chief said the economy needs to slow further to dampen inflation. There’s still too much demand for goods, services and labor, she said.

Even after the economy slows, Mester said, the Fed will likely have to keep interest rates high for a while to make sure inflation recedes back to pre-pandemic levels. That’s expected to result in higher unemployment.

“The transition back to price stability will take some time and will not be without some pain,” Mester said.

Yet the bigger risk to the economy in the long run, she said, is persistently high inflation.

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