Fed's Mester: After half point increases in June and July Fed will “have to see” what more is needed

Cleveland Federal Reserve President Loretta Mester said on Tuesday that inflation will need to show a "compelling" slowdown before the Federal Reserve can consider pausing its interest rate increases, with the risks currently pointed towards a tougher fight to bring the pace of price increases under control.

"I would need to see monthly numbers coming down in a compelling way before I would want to conclude we could now rest," Mester said in an interview with Reuters on the sidelines of an Atlanta Federal Reserve bank conference.

Key notes

Will need to see a "compelling" slowdown of inflation before slowing fed rate increases.

Inflation risks skewed to the upside, an argument for doing more "upfront".

After half-point increases in June and July Fed will "have to see" what more is needed based on data in the meantime.

Expects PCE inflation might be back to around 2.5% in 2023.

Fed MBS sales could mean market losses for the central bank.

Losses would mean lower fed remittances to the treasury, though pose no "operational" problems for the fed itself.

Sales would help return the balance sheet to primary treasuries but could mean realizing losses depending on interest rates at the time.

Losses would also be a communications challenge for the Fed to explain why the benefits of the smaller balance sheet are Final size of the balance sheet will be determined by monitoring market developments as fed holdings decline.

Market implications

The US dollar was choppy on Tuesday, stuck below the 20-year highs made at the start of the week as yields start to consolidate while investors await tomorrow's April Consumer Price Index.

The data could give further signs of inflation that may be starting to cool, following last Friday's wage inflation data. Expectations are calling for a 8.1% annual increase compared to the 8.5% rise recorded in March.