Loretta Mester: Inflation headed lower, with interest rates likely to follow

And at the same time, we’re seeing moderation in demand, but we’re also seeing that labor markets remain healthy. But for me to be feeling that we could start cutting rates, it would be good to get a few more good inflation readings.

I’m expecting the economy to evolve in a way that later this year, the Fed will be able to begin to reduce rates. I can’t give you a timing. It really is going to depend on how the economy actually evolves. But if things evolve as expected, I would expect the Fed would begin reducing rates. But the timing is really going to depend on what the data comes in like.

Q. How did the Fed change during your time there?

A. Probably the biggest change was going from Chair Alan Greenspan to Chair Ben Bernanke. What Ben did was, instead of going first, he would let everyone speak first, and then he would summarize. I did sense that people felt a little freer to actually give their policy views. Chair Janet Yellen and Chair Jerome Powell maintained that format.

There has been this increase in trying to be more transparent, in trying to really explain the rationale for our decisions. Remember, in the old days, the Fed didn’t even release a statement after its meetings. Just think of that. In today’s world, how different it is. We have Chair Powell out doing press conferences, we have the statement after every meeting now.

Q. Why do you think consumer sentiment is still mostly gloomy even as data mostly shows a positive economy?

A. One lesson from this episode is that high inflation is very harmful. If you look at where inflation was highest, it was in essentials. It was food prices, it was all the essential things that people had to buy. And if you’re a lower-income person, you’re spending a bigger part of your consumption basket on those essentials. So inflation really impacted the people with the lowest incomes.

So if you actually look at, well, how much did wages rise since the pandemic, the good news is that the gap between wage and price growth is closing. If you think about your cost of living, can you cover your cost of living with what you’re making? And make up for all the period since the pandemic when you weren’t able to do that? We’re not quite there yet. Even if inflation comes back to 2%, the price level will be higher, but their wages will be higher, too. Are they back to where they were? Not yet, but getting closer. So that’s a good thing.

Q. Are you worried about the Fed’s independence if Donald Trump is elected, given his previous attacks on the Fed?

A. I think not in the sense that Congress, I think they understand the importance of a Fed that’s making monetary policy decisions that aren’t influenced by short-run political considerations. I’ve talked to legislators about this over the years. And all of the ones I’ve talked to, on both sides of the aisle, really understand the importance of that.

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