Another Federal Reserve official "hawks"! Harker: If inflation remains high, rate hikes may be necessary

Bloomberg News, April 7 (Editor: Bian Chun) — On Monday, Cleveland Fed President Loretta Mester said in an interview that if inflation remains above the Federal Reserve’s 2% target, raising interest rates might be appropriate. This is the latest sign that some Fed policymakers are shifting from a dovish stance toward rate cuts.

Mester stated that she generally favors keeping the benchmark interest rate unchanged “for quite some time.”

She also said that if rising gasoline prices lead to economic slowdown and higher unemployment, the Fed might need to cut rates; but if inflation remains high, rate hikes could be necessary.

“I can envision scenarios where rate cuts are needed… for example, if the labor market deteriorates significantly,” Mester said. “I can also imagine that if inflation stays above our target, we might need to raise rates.”

Mester’s comments indicate that at least some officials are increasingly concerned that inflation, already elevated before the outbreak of conflict with Iran, may require further tightening through rate hikes. The Fed’s rate increases would mark a sharp shift from the policy at the end of last year, when the central bank cut rates three times. Rate hikes will raise borrowing costs for consumers and businesses, including mortgage, auto, and credit card rates.

Other Fed officials have recently opened the door to rate hikes, including Chicago Fed President Austan Goolsbee. Additionally, the January Fed meeting minutes showed that several of the 19 voting members supported revising the post-meeting statement to reflect the possibility of “raising” interest rates.

A rate hike by the Fed is almost certain to provoke strong criticism from U.S. President Donald Trump, who has repeatedly criticized the Fed for not cutting rates further and has called for lowering the benchmark rate from around 3.6% to 1%.

This week, the U.S. government will release two inflation reports, but only one may reflect the impact of soaring gasoline prices following the outbreak of war with Iran on February 28. According to AAA data, the national average gasoline price on Monday was $4.12 per gallon, up 80 cents from a month earlier.

On Friday, the U.S. will release the March CPI inflation report, which will be the first to reflect the effects of rising oil and energy prices. A survey by data provider FactSet shows economists expect the annual inflation rate to worsen significantly, jumping from 2.4% in February to 3.1%. On a monthly basis, they forecast the consumer price index for March will rise 0.8% from February, the largest increase in nearly four years.

The U.S. Department of Commerce will release the preferred February PCE inflation data on Thursday, but this will not include any effects from the Iran conflict.

Mester said that Cleveland Fed’s own estimates indicate that inflation in April could reach 3.5%, the highest level since 2024. U.S. inflation surged to 9.1% in June 2022 before gradually easing.

“Inflation has been above our target for more than five years,” Mester said. “Further increases would mean inflation is ‘moving in the wrong direction,’ away from our 2% goal.”

Rising oil prices could threaten the Fed’s two main policy objectives—low inflation and maximum employment—posing a challenge for officials.

Mester said that consumers facing higher gasoline prices might cut spending in other areas, which could slow economic growth and lead to layoffs, prompting the Fed to cut rates in response.

She also noted that the economic impact of the war will depend on its duration and the extent of increases in oil and other costs. She added that the conflict has now entered its sixth week, exceeding her expectations during the Fed’s March 17-18 meeting.

Mester, who has a voting role on monetary policy this year, supported holding rates steady in January and March.