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Cleveland Fed president says it will take one or two years for inflation to sink back to 2%

Loretta Mester has served as president and CEO of the Federal Reserve Bank of Cleveland since 2014. She oversees branches in Pittsburgh and Cincinnati.
An-Li Herring
90.5 WESA
Loretta Mester has served as president and CEO of the Federal Reserve Bank of Cleveland since 2014. She oversees branches in Pittsburgh and Cincinnati.

Inflation in the United States could remain above the Federal Reserve's target of 2% until 2024, warned Federal Reserve Bank of Cleveland President Loretta Mester during a visit to Pittsburgh on Thursday.

“It will take some time for inflation to come back down just because of the nature of what really affected the inflation rates, including the supply side of the economy and demand,” Mester said.

“But we're really committed at the Fed to doing what we can do to put it on [a] sustainable downward path. It will perhaps take another year or two to get back to 2% inflation, but we will see inflation moving down over that time … closer to our goal.”

The consumer price index, a general measure of price changes for everyday goods and services, accelerated to 9.1% in June – the highest year-over-year increase since 1981. Inflation has surged as businesses have struggled to meet sustained consumer demand amid easing pandemic conditions.

“Inflation is a real problem for many, many people, many households. And it's disproportionately, of course, falling on lower income households because it … disproportionately [affected] essential items at the beginning,” she said.

The Federal Reserve has hiked interest rates in its effort to cool the economy. Last week, it pushed up its benchmark rate by 0.75 percentage points for the second time since May.

Mester spoke Thursday at a luncheon hosted by the Economic Club of Pittsburgh. During the program, she said she will need to observe several months of declining inflation before she will conclude that the U.S. Federal Reserve can ease up on rates.

She later told reporters that the Fed should raise interest rates to above 4%.

Mester has led the Cleveland Fed since 2014. With branches in Pittsburgh and Cincinnati, the bank covers Western Pennsylvania, Ohio, the northern panhandle of West Virginia, and Eastern Kentucky. It is one of 12 regional banks in the Federal Reserve System and houses the Fed’s Center for Inflation Research.

Although ongoing supply shortages have contributed to today’s inflation rates, Mester noted that the Fed is not equipped to alleviate the problem. Instead, the central bank seeks to slow consumer demand by raising borrowing costs.

“We know that supply has been very constrained, partly because of the pandemic restrictions, and just the reopening of the economy has been sort of a challenge,” Mester said. “And so we're working on the demand side of the economy to try to bring it back into balance with that supply side. Our tools will not really work on the supply side.”

She acknowledged that, by design, the Fed’s current policy of raising interest rates results in a different kind of hardship for consumers by making it more expensive to borrow money for large purchases, such as a house or a new car.

“But it's very clear to me that if … we want to sustain healthy labor markets, we've got to get back to price stability. So, I understand this is very painful, and all I can do is commit to do what I can with the monetary policy tools at our disposal to … get price pressures under control, get inflation under control and bring it back down to our goal of 2%.”

She said Thursday that it’s possible the Fed can avoid triggering a recession with its rate hikes because demand for labor remains strong.