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Fed’s Mester says returning inflation to 2% will take ‘a couple of years’

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Recession risks are growing and it would take ‘a couple of years’ for inflation to return to the US Federal Reserve’s target of 2 per cent, Loretta Mester, president of the Cleveland Fed, said on Sunday.

“I’m not predicting a recession,” she said. “The recession risks are going up, partly because monetary policy could have pivoted a little earlier than it did. We’re doing that now by moving interest rates up but, of course, there’s a lot of other things going on as well,” Mester said on CBS’s “Face the Nation”.

“We do have growth slowing . . . and that’s OK, we want to see some slowing of demand to get in better line with supply.”

Mester said that while monetary policy can target the excessive demand in the economy, it will take time to get the supply side “to come back into better balance”.

“It isn’t going to be immediate that we see 2 per cent inflation, it will take a couple of years, but it will be moving down,” she said.

US Treasury secretary Janet Yellen conceded on Sunday that the economy would slow, but said a recession was not “inevitable”.

“I expect the economy to slow, it’s been growing at a very rapid rate as the labour market has recovered and we’ve reached full employment,” Yellen said on ABC’s This Week. “We expect a transition to steady and stable growth but I don’t think a recession is at all inevitable.”

The Fed this week raised its main interest rate by 0.75 percentage points, the first time it has done so since 1994.

It also set the stage for much tighter monetary policy in the near term, with officials projecting rates to rise to 3.8 per cent in 2023 and most of those increases scheduled for this year. They now hover between 1.50 per cent and 1.75 per cent.

On Saturday, Fed governor Christopher Waller said he would support another 0.75 percentage point interest rate rise at the central bank’s next meeting in July if, as expected, data showed that inflation had not moderated enough.

Fed chair Jay Powell has said his goal is to bring inflation down while maintaining a strong labour market.

“That’s going to take skill and luck, but I believe it’s possible,” Yellen said.

Yellen said that while there was month-to-month volatility in consumer spending, overall it remained strong and she did not expect a drop off in spending would cause a recession.

“It’s clear that most consumers, even lower-income households, continue to have buffer stocks of savings that will enable them to maintain spending,” the Treasury secretary said. “I don’t see a drop off in consumer spending is a likely cause of the recession in the months ahead.”

The labour market also remained strong, she said, with two job openings for every unemployed worker.

Yellen reiterated the Biden administration’s argument that Russia’s war on Ukraine was partly to blame for high inflation because it boosts global food and energy prices. Supply chain snarls from lockdowns in China are also contributing, she said. Though these factors will not change immediately she said she expected inflation to go down.

“I do expect in the months ahead that the pace of inflation is likely to come down, although, remember there are so many uncertainties relating to global developments,” she said.

Other senior officials on Sunday repeated the line that recession was not inevitable, even as surveys show economists and business leaders expect one next year.

“Where we are in the economy right now is a transition and I’ve spoken to CEOs over the past week from sectors across the economy and they’re figuring out how to navigate the transition,” said Brian Deese, director of the US National Economic Council.

Deese said Biden was working with Congress on legislation to lower costs for things such as prescription drugs and utilities. “The single most impactful thing we can do right now is to work with Congress to pass legislation that would lower the costs of things that families are facing right now,” he said.

The White House also wants the package to include tax reforms that would lower the deficit and is working with senior Senate Democrat Chuck Schumer to put measures in place in the coming weeks, Deese said.

Biden is also looking to reduce petrol prices, and senior administration officials said on Sunday that the US was weighing a temporary pause on the federal gas tax. Yellen said it was “an idea certainly worth considering” and that Biden was looking to work with Congress to try to bring gas prices down.

Energy secretary Jennifer Granholm said on CNN that the Biden administration was evaluating a proposal for a gas tax holiday.



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