Fed's Mester still expects 3 rate cuts in 2024 after new inflation reading

Cleveland Fed president Loretta Mester said Thursday that the latest reading on inflation doesn’t alter her calculus for three rate cuts later in 2024.

A month-over-month jump in the Fed’s preferred inflation gauge "doesn’t really change my view" that inflation is moving down toward the Fed’s 2% target over time, Mester said in an exclusive interview with Yahoo Finance Thursday.

But "it does show you there is a little more work for the Fed to do here in terms of making sure that we can get all the way back to that 2% goal."

She is still predicting three cuts in 2024, an estimate she first made in December. "Right now that feels about right to me if the economy evolves as I anticipate it will," Mester said.

The new comments from the Cleveland Fed president came after the release of the core Personal Consumption Expenditures (PCE) index, which strips out the cost of food and energy and is closely watched by the central bank.

It rose 2.8% over the prior year in January, the slowest annual increase since a 2.2% increase in March 2021.

But compared to the prior month, core PCE rose 0.4%, the most since January 2023 and an increase from the 0.1% increase seen in December. The monthly increase marked a stark shift in the inflation data.

Prior to Thursday's release, the six-month annualized rate of price increases had been below the Fed's 2% goal for two consecutive months. After the January data, the six-month annualized PCE price increase is 2.5%.

Mester, a voting member on the Fed’s rate-setting committee, said the central bank has the opportunity to be patient given that economic growth is solid and the job market is healthy.

"I think we have the opportunity here to be sure to see that things are evolving right," she said. "Right now … I think both the economy and monetary policy is in a good spot."

A number of Fed officials, including Fed Chair Jerome Powell, have cautioned patience about cuts following some higher-than-expected readings on inflation and strong jobs numbers. Several have warned that the path down to 2% will be "bumpy."

The Consumer Price Index (CPI) in January was hotter than economists expected, as was the Producer Price Index (PPI), which tracks the prices businesses pay to manufacture products and services.

Investors are listening. Markets began the year betting on six cuts starting in March, only to revert to three cuts starting in June.

One of Mester’s colleagues, Atlanta Fed president Raphael Bostic, again urged patience in a speech Thursday where he repeated his prediction of cuts this summer.

"The last few inflation readings — one came out today — have shown that this is not going to be an inexorable march that gets you immediately to 2%, but that rather there are going to be some bumps along the way," Bostic said.

Mester told Yahoo Finance that right now she expects demand will moderate because of high interest rates cooling the economy.

She also pointed to signs consumers are being more careful with their spending and business investment that’s come down.

As growth moderates, "that normalization is what will get inflation all the way back."

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