Fed’s Mester backs 75 basis point hike in July if conditions remain the same

Cleveland Fed President Loretta Mester takes part in a panel convened to speak about the health of the U.S. economy in New York November 18, 2015.

The president of the Federal Reserve Bank of Cleveland wants the central bank to raise interest rates by 75 basis points if the economy stays the same.

The Fed's path of monetary tightening has become a key driver of market activity in recent months as the central bank looks to act aggressively to rein in soaring inflation.

The Fed hiked its benchmark rate by 75 basis points earlier this month, the biggest increase since 1994.

The July meeting of the Federal Open Market Committee will likely include a debate over whether to opt for 50 or 75 basis points, according to Mester.

If conditions were the same as they are now, I would advocate for 75 because I don't think we can go back to 50 increases.

The preferred path of monetary policy tightening will be determined by the assessment of supply and demand conditions over the next few weeks.

The Fed's benchmark rate is expected to rise to 3.4% by the end of the year, from its current target range of 1.5%-1.75%, according to thedot plot.

There is more uncertainty about how far we will need to go in the future if we don't get interest rates up to that 3- 3.5%.

‘Painful transition’

The disappointing consumer confidence reading, which came in at 98.7 against the consensus estimate of 100, sent the U.S. markets tumbling on Tuesday.

Consumers' experience of inflation, which hit 8.6% at the headline level in May, was "clouding" their confidence in the economy.

She said that the Fed was on a path to bring their interest rates up to a more normal level and that they would like to get inflation down so that they can sustain a good economy.

To get inflation rates under control is one of the jobs we need to do now.

There is a risk of a recession as the Fed tightens. As the Fed tries to moderate demand and bring it closer to constrained supply, she expects growth to be slower this year.

She said that she expects the unemployment rate to rise over the next two years to 4% or 4%.

It's very necessary that we do it to get those inflation numbers down because it's going to be a painful one in some respects.