Cleveland Fed President Loretta Mester said Tuesday that the central bank could lower interest rates "later this year," warning it would be a "mistake" to cut too soon.
"It would be a mistake to move rates down too soon or too quickly without sufficient evidence that inflation was on a sustainable and timely path back to 2%," Mester said in a speech in Columbus, Ohio.
But "if the economy evolves as expected, I think we will gain that confidence later this year, and then we can begin moving rates down."
Mester is a voting member of the Fed's Federal Open Market Committee, which decides whether rates go up or down, but will exit her post in mid-2024 due to the Fed's mandatory age and length-of-service policies.
She believes three rate cuts would still be appropriate this year, in line with the median projection by FOMC members provided in December. Investors are predicting five.
Mester is the latest policymaker to pump the brakes on Wall Street expectations for an aggressive pace of cuts in 2024.
That includes Chair Jay Powell, who said in a press conference last week that a March cut is "probably not the most likely case or what we'd call the base case." He made the same point in an interview on the TV program "60 Minutes" that aired Sunday night.
Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards
A stronger-than-expected jobs report released Friday means the central bank is even more likely to move out any consideration of interest rate cuts closer to the second half of an election year. That places the Fed on a collision course with figures on both sides of the political divide who are ready to attack Powell if the cuts come too soon or too late for their liking.
Those critics include Republican front-runner Donald Trump, who argued Friday that "it looks to me like he's trying to lower interest rates for the sake of maybe getting people elected."
What had the Fed considering cuts this year is the faster-than-expected drop in inflation over the past year. Mester says there are reasons to be cautious in assuming that the rate will continue falling at the same clip.
Supply chain disruptions that accounted for a large portion of the rapid drop have largely been resolved, she said, and can't be counted on this year to do as much to bring inflation down.
At the same time, she expects consumer spending to moderate this year, especially as lower-income families have spent savings accumulated during the pandemic.
Another Fed official, Minneapolis Fed President Neel Kashkari, said separately Tuesday that the Fed has not yet reached its goal. But, he added, it looks like the US will avoid recession this year and inflation is on the right track based on the latest data from the last three and six months.
"The six-month data is basically there and the three month data is basically there," Kashkari said during a question and answer session in Minnesota.
"I don't want to say we're necessarily going to just glide past all the way to 2% but fingers crossed, the data is looking positive."
The Fed, Mester said, is in a position of risk management now when it comes to deciding when to lower rates, pointing out that it doesn’t want to undermine the work of getting inflation back down.
She wants to see a continuation of the fall inflation experienced over the past six months, but it does not necessarily have to be at same pace.
The strong job market and continued strong consumer spending give the Fed the opportunity to hold rates at current levels to gather more evidence that inflation is sustainably returning to the central bank’s 2% target, she added.
"This is better than finding ourselves in a situation where we begin easing too soon, undo some of the progress we have made on inflation, potentially destabilize inflation expectations, and then have to reverse course."
The risk is that if year-ahead inflation expectations continue to decline, maintaining rates at current levels for too long would act as a de facto tightening that could risk deteriorating the job market.
When the Fed does begin lowering rates, Mester expects it will do so at a gradual pace as the central bank navigates keeping inflation at bay while making sure the job market remains strong.
Mester also said the central bank will have a discussion at its policy meeting in March on when to begin winding down the pace of quantitative easing, or the pace with which the Fed is letting securities roll of its portfolio.
Mester said she suspects the Fed will move towards slowing the pace later this year and eventually later wouldn’t rule out sales of securities.
She said the goal is to have a balance sheet that is primarily Treasuries as opposed to mortgage-backed securities that are part of the portfolio now.
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