Federal Reserve's Loretta Mester Expects Likelihood Of More Rate Hikes — Here's Why

Federal Reserve Bank of Cleveland President Loretta Mester sees possibility of more interest rate hikes in the wake of signs indicating the recent banking crisis have abated.

What Happened: Mester said she expects monetary policy moving “somewhat further into restrictive territory this year, with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time," according to a Reuters report.

U.S. markets closed in the red on Monday after job openings in February declined to the lowest level in about two years while factory orders dropped for a second straight month, showing signs the economy might be weakening.

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"Precisely how much higher the federal funds rate will need to go from here and for how long policy will need to remain restrictive will depend on how much inflation and inflation expectations are moving down, and that will depend on how much demand is slowing, supply challenges are being resolved, and price pressures are easing," Mester said in a speech before a group of economists in New York.

The Cleveland Fed President said she sees somewhat more persistent inflation pressures than the median forecast among FOMC participants and pushed back on market views that the Fed will need to reduce rates much sooner than central bankers currently expect.

"Can I come up with scenarios that would have the Fed cutting rates? Yes. Is it my modal forecast? No," she said.

Banking Crisis: Mester also expressed confidence on the banking sector saying the stresses have eased and added that the central bank is monitoring the conditions carefully.

"The U.S. banking system is sound and resilient," she said. "The stresses experienced in the banking system in March have eased, but the Fed continues to carefully monitor conditions and is prepared to take further steps as necessary to ensure financial stability," she added.

It is noteworthy that JP Morgan CEO Jamie Dimon cautioned shareholders in a letter that the U.S. banking crisis is ongoing and that its impact will be felt for years.

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