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The Fed’s Mester supports a 75 basis point hike in July if conditions hold

Cleveland Fed President Loretta Mester attends a panel called to discuss the health of the U.S. economy in New York November 18, 2015.

Luca Jackson | Reuters

Federal Reserve Bank of Cleveland President Loretta Mester said on Wednesday that she will push for a 75 basis point rate hike if economic conditions hold steady when the Federal Reserve decides its next monetary policy move in July.

The Fed’s path of monetary tightening has become a key driver of market activity in recent months as the central bank seeks to act aggressively to curb rising inflation while acknowledging the risk that stronger rate hikes will increase the likelihood of an economic recession will increase.

The Fed decided earlier this month to raise its benchmark interest rate by 75 basis points, the largest hike since 1994, with inflation at a 40-year high.

Mester — a voting member of the Federal Open Market Committee — said the July meeting will likely include a debate among FOMC policymakers on whether to go for 50 basis points or 75 basis points.

“If conditions were exactly as they went to this meeting today – if the meeting was today – I would argue for 75 because I haven’t seen the kind of numbers on the inflation side that I have to see to think that we can go back to a 50 raise,” she told CNBC’s Annette Weisbach.

Mester said she would conduct an assessment of supply and demand conditions in the coming weeks ahead of the meeting to determine the preferred path of monetary tightening.

The “dot plot” of individual FOMC members’ expectations places the Fed’s policy rate at 3.4% by the end of the year from its current target range of 1.5% to 1.75%.

“I think getting interest rates to those 3-3.5% is really important that we do that, and do it quickly and consistently as we move forward, so it’s past that point where I think it’s more There is uncertainty about how far we need to go to contain inflation,” Mester said.

“Painful Transition”

US markets tumbled on Tuesday after a disappointing consumer confidence reading, which came in at 98.7 versus a Dow Jones consensus estimate of 100, adding to investors’ jitters about slowing economic growth and the potential amplifying effect of aggressive monetary tightening.

Mester pointed out that consumers’ experience with inflation, which reached a headline 8.6% in May, was “damaging” their confidence in the economy.

“Now at the Fed, we’re on our way to getting our interest rates to more normal levels and then probably a little higher into a restrictive zone so we can bring those inflation rates down so we can hold a good economy going forward,” she said .

“Task one for us now is to get inflation rates under control and I think that’s affecting how consumers feel about the economy and where it’s going at the moment.”

Mester acknowledged that there is a risk of a recession as the Fed begins tightening. However, its baseline forecast is that growth this year will be below “trend growth,” which it puts at 2%, as the Fed seeks to dampen demand and bring it closer to limited supply.

“I expect the unemployment rate to go up to just over 4% or 4.25% in the next two years and that’s still very good labor market conditions,” she said.

“So we’re in this transition right now, and I think it’s going to be painful in some ways and bumpy in some ways, but it’s very necessary that we do it to bring those inflation numbers down.”