Loretta Mester, president of the Cleveland Federal Reserve, stated Friday that interest rates would likely have to continue to rise to restore inflation to an acceptable level. According to Mester, the central bank’s benchmark interest rate must rise above 5% and remain there for some time. The federal funds rate, which determines the cost of overnight borrowing among banks but also influences many types of consumer debt, is currently in the range of 4.5%-4.75%. “I see that we’re going to have to bring interest rates above 5%,” she told CNBC’s Steve Liesman during a “Squawk Box” interview. “We’ll figure out how much above. That’s going to depend on how the economy evolves over time. But I do think we have to be somewhat above 5% and hold there for a time in order to get inflation on a sustainable downward path to 2%.” She made headlines recently when she revealed that she was among a small group of Fed officials who, at the January 31-February 1 Federal Open Market Committee, wanted a half percentage point rate hike rather than the quarter-point move the panel approved.
Despite not voting this year on the FOMC, she is involved in decisions. She said she’s unsure whether she will push for a half-point increase when the committee meets again in March. “I don’t prejudge,” she said. “That’s a tactical decision that we make at the meeting.” Many economists expect the Fed won’t be able to achieve its inflation goal without tipping the economy into a recession. According to the Atlanta Fed, GDP grew at 2.7% in the fourth quarter of 2022 and is tracking at about a 2.5% rate in the first quarter of 2023.