Loretta Meester, President of the Federal Reserve Bank of Cleveland, participates in a panel discussion gathered to speak about the health of the US economy in New York on November 18, 2015.
Lucas Jackson | Reuters
Cleveland Fed President Loretta Meester said on Wednesday that if economic conditions remain the same when the US central bank meets to decide on its next monetary policy in July, it will call for a 75 basis point rate hike.
The Fed’s monetary tightening path has become a major driver of market activity in recent months as the central bank looks to act aggressively to rein in high inflation, while acknowledging the risks that a sharp rise in interest rates will increase the likelihood of an economic recession.
The Fed chose to raise its benchmark rate by 75 basis points earlier this month, the largest increase since 1994, as inflation soared to a 40-year high.
Meester – a voting member of the FOMC – said the July meeting will likely include a discussion among FOMC policymakers about whether to choose 50 basis points or 75 basis points.
“If the conditions were exactly what they were today at that meeting – if it was today – I would defend 75 because I didn’t see the kind of inflation-related numbers I needed to see until I thought we could go back to an increase of 50,” she told CNBC’s Annette Weisbach.
Meester said she will assess supply and demand conditions over the coming weeks ahead of the meeting in order to determine the preferred path of monetary tightening.
The FOMC members’ “point chart” forecast puts the Fed’s benchmark interest rate at 3.44% by the end of the year, from the current target range of 1.5%-1.75%.
“I think raising rates to 3-3.5%, it’s really important that we do that, we do it urgently and we do it consistently as we go forward, so I think after that point there is more uncertainty about the long-term we will need to go,” Meester said. in order to curb inflation.
US markets fell on Tuesday after a disappointing reading of consumer confidence, which came in at 98.7 versus the Dow Jones consensus estimate of 100, added to investor concerns about slowing economic growth and the potential compounding effect of monetary tightening.
Meester noted that consumers’ experience with inflation, which reached 8.6% at the headline level in May, is “weakening” their confidence in the economy.
“At the Fed, we’re on our way now to raise our interest rates to a more normal level and then maybe a little bit higher in the restricted area, so we can bring those inflation rates down so we can keep the economy moving forward,” she said.
“The first task for us now is to control inflation, and I think that now colors how consumers feel about the economy and where it’s going.”
Meester acknowledged that there is a risk of a recession as the Fed embarks on its tightening policy. However, its primary forecast is for growth to be slower this year, below “trend growth,” which it puts at 2%, as the Fed attempts to cool demand and bring it closer to restricted supply.
“I expect to see unemployment rise over the next two years to just over 4% or 4.25%, and again labor market conditions are still very good,” she said.
“So we are in this transition now, and I think this is going to be painful in some ways and it will be a bumpy road in some ways, but it is absolutely necessary that we do that to bring these inflation numbers down.”