Mester Says Latest Inflation Data Shows Fed Has More Work to Do

(Bloomberg) — Federal Reserve Bank of Cleveland President Loretta Mester said inflation data out Thursday showed that policymakers have more work to do to cool price pressures, but said it didn’t change her expectation that the Fed will cut interest rates three times this year.

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In an interview with Yahoo Finance, Mester said it’s unlikely that inflation will continue to ease as quickly as it did last year, when improvements in supply chains and a growing workforce helped quell price increases. The Fed’s preferred gauge of underlying inflation rose 0.4% in January, the fastest pace since early 2023, according to government data.

“It doesn’t really change my view that inflation is going to be going down to our 2% goal over time, but it does show you that there’s a little more work for the Fed to do here,” she said.

Mester has previously said she projected three rate cuts in 2024 when officials last updated their quarterly economic forecasts.

“Right now, that feels about right to me if the economy evolves as I anticipate it will,” she said Thursday. Fed officials will update those forecasts at their March 19-20 meeting.

“I do think we’ll see some moderation on the employment side, and those are the conditions that we need to see to be able to assess, OK, the economy is evolving the way we want,” she said. “If inflation expectations — year-ahead inflation expectations — continue to move down then I think we’re in a good spot where we could consider an easing of the restrictive level that we’re in.”

Capital Rule

In separate comments earlier Thursday, Mester repeated her support for regulators’ plans to significantly increase capital requirements for the US’s largest banks.

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The so-called Basel III proposal released by the Fed, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency last July would require the biggest lenders to increase their capital levels by 19%. The plan has drawn fierce pushback from Wall Street banks.

“In my view, at the larger banks, current minimum capital standards are still below the level where an increase would be counterproductive in terms of thwarting productive risk-taking, beneficial innovation, or economic growth,” she said in remarks prepared for a speech at Columbia University at a conference that was backed by the Bank Policy Institute, which has lobbied against the proposal.

“High leverage has been shown to be a major contributor to the severity of financial crises, while a well-capitalized banking system – reflecting both the amount and the quality of the capital – is less likely to amplify negative macroeconomic shocks and is more resilient,” she added. “I view the Basel III endgame capital proposal as a recalibration aligned with this view.”

After months of lobbying over the issue, the topic is politically divisive. Democratic officials have argued that failures of Silicon Valley Bank and Signature Bank last March, followed by First Republic Bank’s collapse in May, injected urgency into the need for tougher rules. However, Republicans on Capitol Hill and GOP-appointed regulators say the plan goes too far and could hurt lending.

Read More: Bowman Says Fed’s Bank Capital Proposal Needs Big Changes

Meanwhile, Michael Barr, the Fed’s vice chair for supervision, says the changes would keep banks from taking risks that could ultimately hurt the economy. On Thursday, Mester signaled support for that view.

Mester is a member of the Federal Open Market Committee and votes on monetary policy decisions this year. But she does not vote on bank regulatory policy, which is set by the Fed’s board of governors in Washington.

Mester says strong supervision, in addition to new capital rules, are needed. “We can make improvements to our supervisory process that I think would address some of the concerns about bank failures,” she said at the event. “We have new regulations coming but supervision should be more dynamic and that would help in addition to new regulation.”

(Updates with Mester comments throughout.)

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