Inflation Remains a Concern for the Federal Reserve

Cleveland Federal Reserve President Loretta Mester expressed her concerns about inflation, stating that it still remains too high and well above the Federal Reserve's target of 2%. Speaking at an ECB research conference, Mester acknowledged that some progress has been made, but emphasized the need for further action.

Evaluating the Restrictiveness of Monetary Policy

The Federal Reserve is currently assessing whether the fed funds benchmark rate is sufficiently restrictive and how long policy will need to remain in place to combat inflation. Mester emphasized that future policy decisions will aim to balance the risks associated with both over-tightening and under-tightening monetary policy.

Interest Rate Hikes and a Strong Labor Market

In July, the Fed raised its benchmark rate by 25 basis points, bringing it to a range of 5.25%-5.5%. Additional rate hikes were penciled in for the rest of the year. Mester also touched upon the state of the labor market, noting that although job growth has slowed and job openings are down, unemployment remains low at 3.8%.

The Fed's Path Forward

Speculation among derivatives traders suggests that the Fed will keep rates steady at their upcoming meeting in September, while some economists believe that the Fed has already completed its rate hikes. Mester expressed her belief that bringing inflation down will require another rate hike, though she did not specify a timeframe.

Long-Term Rate Projections

Mester anticipates that interest rates will likely remain unchanged for most of 2024. As a voting member of the Fed's interest-rate committee next year, she will have a direct influence on future rate decisions.

Impact on Bond Yields

As a result of recent economic data indicating a slowdown, the 10-year Treasury yield has decreased by approximately 15 basis points this week.