Yahoo Finance Jackson Hole 2022: Cleveland Fed President Loretta Mester speaks with Yahoo Finance [Transcript]
Loretta Mester, president of the Federal Reserve Bank of Cleveland, joined Yahoo Finance on the sidelines of the annual Jackson Hole symposium discuss the Fed's firefight with inflation amid recessionary concerns.
Below is a transcript of her appearance, which was taped and aired on Aug. 26.
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BRIAN CHEUNG: Yahoo Finance here onsite at the Jackson Hole Economic Symposium. I'm sitting here next to Cleveland Fed President Loreta Mester, President Mester, great to see you.
LORETTA MESTER: Thanks. Great to be here.
BRIAN CHEUNG: So let's just jump right into it. We heard a pretty interesting speech from the Fed Chair this morning, much shorter than usual. Wondering what your big takeaways from that speech were.
LORETTA MESTER: Well, I thought it was a very strong speech. I thought it was a very good message that had to be sent and I think he delivered it well,
BRIAN CHEUNG: When you say, had to be sent, what do you think was that message? Why, why did he have to —
LORETTA MESTER: Well, I think it's an important message because I think there's been a lot of confusion maybe in the markets about what, what the plan was for the Fed. And I think he was very clear about that we still have to get inflation down, that we're gonna use our tools to do so. And that we recognize that, you know, moderating demand is gonna involve some pain, but it's important to do it in order to get inflation on that downward trajectory back to our goal of 2%. And it actually will be less costly to do this now than to fail on that mission.
BRIAN CHEUNG: So you say pain, you say costly. These are words that maybe we don't often want to hear when it comes to Fed policy, but labor market, I imagine is the big focus point of that. 3.5% unemployment, how much pain needs to be had in the labor market to get inflation down?
LORETTA MESTER: Well, just, just to be clear, there's already a lot of pain out there. This inflation is so high, it's really inflicting a lot of, you know, distress on a lot of families. So, you know, it's not like an either or: no pain or, you know, pain later or pain now. This is painful right now for a lot of families. It's very hard to have to make choices between essentials. That said, you know, in order to moderate demand so that it comes into better balance with supply, I do think that growth is gonna be below trend for a while. And I do think the unemployment rate is gonna move up from levels that we have now. Now how much, you know, it'll depend on how fast demand moderates and how fast inflation comes down and perhaps some positives on the supply side, if the constraints on the supply side, you know, ease off. But that said, because the labor market is actually very, very tight right now, you could get a back to a soft landing environment, which is what we're aiming for, based on what's happening in the labor market. So again, unemployment will go up probably, but I don't necessarily think it's gonna go up to the typical, you know, what we see during, you know, deep recessions. It doesn't have to be that way.
BRIAN CHEUNG: So on that point, it sounds like the Fed still wants to continue with rate hikes. That was the implication from the speech, the next meeting in September. Wondering if you have thoughts about whether or not that should be that unusually large size that we've seen of 75 basis points or that at some point test of maybe at some point actually making those hikes a little bit smaller.
LORETTA MESTER: Yeah. So, you know, at this point we're gonna be looking at some more data before that meeting, but I do think that it's premature to even think that inflation has peaked. And so we, you know, the July inflation report was, had some positive, it was welcome news, but it was based on, you know, basically a downturn in energy prices and we know they're volatile. So again, there's a lot of inflation out there still, and I think we're gonna have to move interest rates up and continue to do that until we get compelling evidence and inflation is moving back down.
BRIAN CHEUNG: When you talk about compelling evidence, you've made remarks before that suggests that while the decline in oil prices that has led to maybe a plateauing in the CPI, and now as of this morning, the PCE reports as well suggest that that's not enough. So what more would you need to see in the inflation report to really tell you that the rate hikes are starting to bite here?
LORETTA MESTER: Right, so underlying inflation, you know, is really a good indicator of trend and there's different measures of underlying inflation. Like the core measures, the Cleveland Fed produces median and mean measures. And they're basically good indicators of sort of where the inflation is going. I'd need to see some more evidence, multiple, you know, several months of evidence that those are moving back down. We know that service inflation is still high, and we know that rents take a while to work through and rents are very high. So again, I think it's really premature to say that inflation has peaked and that it's on that downward trend. We want it to be on a sustainable downward trend. And I'm just gonna need to see, you know, several more months of, you know, better inflation data to be able to even say that it's peaked.
BRIAN CHEUNG: Now, the overall inflation story I imagine is something that you're trying to read, how markets are reading the Fed's approach to that. We saw a substantial easing of financial conditions after the June meeting, which maybe set the tone for the chair's speech today. Do you think that markets are now getting the message? Because we've seen a bit of a reversal over the last two weeks or so tenured yield coming back a little bit higher. Is it tight enough to try to achieve what you're doing here?
LORETTA MESTER: Well, you know, the markets make a lot of decisions based on their read of the future as well and what the Fed is planning to do and how we can do it. All we can do at the Fed is make sure that we're sending the message as we see it. You know, we are not prescient, right? So all our decisions are based on how is the economy evolving and what is that incoming data tell us about our outlook and inform our outlook. So again, we can give you sort of, we have an inflation problem it's way too high. It's unacceptably high, we're on a path of increasing interest rates until we see inflation move back down to 2% and the markets are gonna react the way they react, whether you know, it's based on their difference of opinion about the outlook or whether it's their not understanding or believing that we're committed to this. But I can tell you that we're very committed to making this happen.
BRIAN CHEUNG: Now on that commitment, there is the lag effect of monetary policy, which makes the timing of all this fairly challenging from the perspective that after you do a rate hike, it's gonna take some time to bleed through to the economy, but you're also hinging those decisions on economic data that could be reflecting conditions from four weeks prior. So how do you account for that? How do you think about revisions, for example, when you're trying to make those decisions?
LORETTA MESTER: So you do know the data's gonna be revised. So you go in knowing that fact and that therefore you take that into account. I would say that, yes, the data tells you about perhaps the prior four weeks, but it's the implications of those data for the future. That really, and the outlook that really informs my policy decisions. So for example, I don't think it would be appropriate for us to continue raising interest rates until inflation is at 2%. Like, that isn't forward looking, right. We, we know that inflation, you know, we know that monetary policy goes to through the whole economy with a lag. And so we're gonna have to, you know, navigate that as we go. And that's based on the assessment of where demand is relative to supply. And whether we get that in back into better balance, right? And that's gonna inform the policy path going forward,
BRIAN CHEUNG: Dark horses, China slowing down. Concerns about recession happening in Europe as well, inflation a global phenomenon. Wondering how you think about those as you make policy here domestically.
LORETTA MESTER: Well, those are risks to our outlook. Those are risks to our forecast, right? So we have to take those on account as we think about what's happening. So the China situation is one where it would impact indirectly on the US economy, through our exports. You know, Europe is another situation that has upside risks for energy prices, which of course, that will affect our inflation measures. So yes, there are risks out there on both the upside and the downside. And that'll be part of the assessment as we go forward of how much is demand moderating and is it getting into better balance and how quickly it gets into better balance with supply
BRIAN CHEUNG: Quantitative tightening on the balance sheet. You're about to get up to the full speed of the roll off in September, $95 billion a month of the roll off. At the same time, if you're accelerating the pace of rate hikes or have accelerated the pace of rate hikes over the last four meetings or so, why not also be more aggressive on quantitative tightening from the perspective of maybe even actively selling securities?
LORETTA MESTER: Yeah, well, as you know, in the March minutes of the meeting, you know, there was a remark in there that at some point we need to think about selling some of the [mortgage-backed securities], but at this point that doesn't seem that important for the path going forward. I think sticking to the plan that we set out, which didn't rule out sales, but has this very methodical, you know, allowing the runoff to happen in a very predictable manner. That seems to be the right thing to do at this point. And then our active tool for policy is gonna be the Fed funds rate.
BRIAN CHEUNG: Fiscal policy. I know you don't tend to comment on specific policies, but just a lot of interest in the Inflation Reduction Act, just given even the macro nature of that title, wondering how you think that impacts policy now? Is there anything that's in there that you see that could actually weigh on the impact of monetary policy as well?
LORETTA MESTER: Well, if you look at some of the analyses that have been done on that act, the effects are gonna be in the future, not more immediate ones, so that it's not influencing my view of what's appropriate monetary policy at this point.
BRIAN CHEUNG: And then last question here, when we just talk about how much further the Fed needs to go here, not talking from a basis points type of perspective. For Americans that are watching this wondering, when is this pain— how much worse is this pain gonna be? And when's it gonna stop? What’s the message?
LORETTA MESTER: Yeah well, I believe that we're gonna have to get interest rates up probably a little above 4% by sometime early next year and hold them there. I don't have a recession in my own forecast for the economy. I do think growth will be below 2%, which is my trend rate. And I do believe the unemployment rate will go up, you know, to a little bit more than where it is now to four, to four and a quarter percent, and that's gonna be painful for the people that that affects. But the alternative is also very painful. We cannot continue having a strong labor market and getting back to those very strong labor market conditions we had in the previous 10 year plus expansion, unless we get inflation under control. So this is about some pain now for a much better future.
BRIAN CHEUNG: Cleveland Fed president Lorena Mester here on-site in Jackson Hole. Thanks so much. Appreciate it.
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