Mester: "US Inflation Stagnant... Fed Should Be Cautious With Further Rate Cuts" [ASSA 2026]

ASSA 2026 Annual Meeting of the American Economic Association
"Service Prices Excluding Housing Costs Continue to Rise"
"Current Policy Rate Is Neutral... Priority Should Be Given to Inflation"

Loretta Mester, former President of the Federal Reserve Bank of Cleveland, stated on January 4 (local time) that inflation is showing signs of stagnation and that the Federal Reserve should be cautious about further interest rate cuts this year. She believes that the current benchmark interest rate has reached a 'neutral' level, meaning it is neither stimulating nor restraining the economy.

Loretta Mester, former President of the Federal Reserve Bank of Cleveland, is interviewed by Korean reporters on the 4th (local time) at the Annual Meeting of the American Economic Association (ASSA) 2026 held in Philadelphia, Pennsylvania, USA.

Attending the Annual Meeting of the American Economic Association (ASSA) 2026 in Philadelphia, Mester told Korean reporters, "I want to see more convincing evidence that inflation will actually fall to 2%." Mester, who served as President of the Cleveland Fed from 2014 to 2024, was regarded as one of the leading 'hawks' (supporters of monetary tightening) within the Federal Reserve during her tenure.

In particular, she pointed out that although the Fed considers tariff-driven price pressures to be one-off factors, more structural inflationary pressures still remain.

She emphasized, "Service price indices excluding housing costs, which are not directly affected by tariffs, have not fallen and have actually risen in recent months. If I were a member of the Fed, I would focus on this aspect." However, she predicted that if tariff policies remain at their current level, the inflationary impact of tariffs will likely disappear around the middle of this year.

Regarding the recent labor market, she diagnosed that both demand and supply are weakening simultaneously. Mester explained, "Labor demand has slowed, but labor supply has also declined due to immigration restrictions. Although the unemployment rate has risen somewhat, overall, the labor market is in an unstable equilibrium between demand and supply."

At this point, Mester believes inflation is a greater concern than the labor market. Based on her assessment of the economy, she reiterated the need for a cautious approach to monetary policy. She evaluated the current benchmark interest rate of 3.5% to 3.75% per year as "neutral or only very slightly restrictive," and stated, "Unless there is clear evidence that inflation is falling to 2% or there are tangible changes in the labor market, the Fed should be cautious about rushing to cut rates."

Nevertheless, she predicted that the U.S. economy will continue to grow this year. She analyzed that tax cuts and fiscal stimulus from the Donald Trump administration will support consumption, and that increased corporate investment in artificial intelligence (AI) and investment tax incentives will also serve as growth engines.

Regarding the next Fed Chair, whom President Trump is expected to nominate within this month, she commented, "It is important to make policy decisions based on economic conditions rather than short-term political considerations," and assessed that all the current candidates have sufficient qualifications. Potential successors to Jerome Powell, whose term as Fed Chair expires in May this year, include Kevin Hassett, Chairman of the White House National Economic Council (NEC); Kevin Warsh, former Fed Governor; and Christopher Waller, current Fed Governor.

Additionally, she viewed the recent internal divisions within the Fed over the interest rate path positively. Mester stated, "In times of great economic uncertainty, having a variety of perspectives is actually healthy," and added, "Having multiple viewpoints reflected in the policy-making process is positive for the Federal Open Market Committee (FOMC)."