The Federal Reserve will vote next year to "pour cold water" again: more evidence is needed to confirm that "inflation has subsided"

Can the cooling of inflation continue? Fed officials let the hawks fly again.

On Thursday, Cleveland Fed President Loretta Mester said the cooling in inflation reflected in this week's CPI and PPI data was not enough to convince her that the Fed has won the battle against inflation.

Mester said in an interview: "We are making progress on inflation, significant progress. We need to see more."

This week, the US Department of Labor successively released the US CPI and PPI data in October. Both core CPI and PPI measures of inflation slowed more than expected in October.

U.S. nonfarm job creation slowed more than expected in October and the unemployment rate rose to its highest level since January 2022, suggesting the labor market is also starting to cool.

The data have all convinced the market that the Fed's rate hike cycle is over.

Cme Group's Fedwatch tool shows that the probability of no rate rise has been above 50 per cent from next month through March. The fed funds futures market is now pricing in a 4 percentage point rate cut next year, according to a separate CME tally.

But for Mester, these nodal numbers aren't enough to be completely convincing, she says:

"I haven't evaluated it yet. I think our policy is basically in a very good place right now,"

"We're going to have to see more evidence that inflation is moving back to 2 percent in time." But we do have good evidence that inflation has progressed, and now it's just, will it continue?"

Loretta Mester has not made up her mind on exactly where interest rates will go, and she will reserve judgment on where policymakers will go from here:

"My sense is that it's not really a question of rate cuts. It's really about how long we're going to keep our restrictive stance and maybe have to raise interest rates given what's happening in the economy."

Mester, who has long been considered a "big hawk" at the Fed, has received a vote on the Federal Open Market Committee in 2024 and will retire in the middle of next year as her term expires.

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