Fed’s Mester sees rate cuts this year, but flags cutting too soon as bigger risk

Investing.com — Cleveland Fed President Loretta Mester said Tuesday she continues to see interest rate cuts this year, but said pivoting to cuts too early rather than keeping them higher for longer was the bigger risk.

If the economy evolves as expected, then in my view it will be appropriate for the FOMC to begin reducing the fed funds rate later this year, Mester said, though added that it was unlikely that she would have information by the time of the FOMC’s next meeting in May to “make that determination.”

Markets are now pricing in 62% chance the Fed pivots to cuts in June, according to Investing.com’s

Mester acknowledged that as inflation continues to slow, the risk around the path of monetary policy is becoming more two sided: Cut rates too early and undo the progress made on inflation, or leave rates too high for too long and potentially weaken in the labor market too much.

But the Cleveland Fed President flagged the “bigger risk” at this would be to “begin reducing the funds rate too early.”  “And with labor markets and economic growth both being very solid, we do not need to take that risk,” she added.

In sign the avoiding an economic recession or achieving a soft landing is coming more into view, Mester suggested the Fed could roll out bigger and faster cuts should the labor market weaken faster than expected, but also cautioned that a bottoming deflation above the Fed’s 2% goal would also muddy the rate-cut path. 

“If the labor market deteriorates, we can move rates down sooner and more quickly than in our baseline. Rather than view this as a normalization, the intention would be to return to an accommodative stance of monetary policy to support the economy,” Mester said. 

The remarks come just days ahead of another update on the monthly jobs data for March, with economists forecasting 205,000 jobs were created last month, which would lag the 275,000 seen in the prior month.