(Bloomberg) — Federal Reserve Bank of Cleveland President Loretta Mester said while she was encouraged by October’s better-than-expected inflation report, she remains more concerned the central bank could fail to sufficiently tighten monetary policy.
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“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,” Mester said Thursday in prepared remarks for an event hosted by Princeton University.
Data released earlier on Thursday showed price growth cooling by more than expected in October, with the consumer price index rising 7.7% from a year earlier versus 8.2% the month before. News of the better-than-expected CPI report sent bond yields plummeting and saw investors harden bets that the Fed would scale back the size of its next rate increase in December to 50 basis points.
“This morning’s October CPI report also suggests some easing in overall and core inflation,” Mester said. “On the other hand, services inflation, which tends to be sticky, has not yet shown signs of slowing. In addition, inflation continues to be broad-based.”
The Cleveland Fed president said she wants the economy to experience a period of below-trend growth — including a possible contraction — to reduce price pressures and balance the labor market that she views as overheated.
“Given the current level of inflation, its broad-based nature, and its persistence, I believe monetary policy will need to become more restrictive and remain restrictive for a while in order to put inflation on a sustainable downward path to 2%,” Mester said.
Mester said the central bank will move with “care and conscientiousness” in returning inflation to the Fed’s 2% target.
“The transition back to price stability will take some time and will not be without some pain,” she added. “It is likely that there will continue to be higher-than-normal levels of financial-market volatility, which can be difficult to navigate. With growth likely to be well below trend, it could easily turn negative for a time.”
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