In a recent statement, Cleveland Federal Reserve President Loretta Mester expressed her expectation for interest rate cuts to occur later this year, but she ruled out the possibility of a rate cut at the next policy meeting in May. Mester also highlighted that the long-run path for interest rates is higher than previously thought, signaling a shift in policy perspectives.

Despite ruling out a rate cut in May, Mester acknowledged the progress made on inflation and the continuous growth of the economy. She emphasized that if the positive trends continue, rate cuts are likely to be implemented, although she did not provide specific guidance on the timing or extent of these cuts.

"I continue to think that inflation will continue on its downward trajectory to 2 percent over time. But I need to see more data to raise my confidence," Mester stated in a prepared speech in Cleveland. She also emphasized the importance of additional inflation readings to determine whether recent higher-than-expected data points are temporary blips or a sign of a stalled progress on inflation.

Mester's remarks effectively ruled out the possibility of a rate cut during the upcoming Federal Open Market Committee (FOMC) meeting on April 30-May 1. Market pricing also reflects this sentiment. As a voting member of the FOMC, Mester's comments carry weight in shaping monetary policy. However, she is set to leave in June, as she has reached the 10-year limit of her term.

Futures traders anticipate the Federal Reserve to start easing in June, with expectations of a three-quarter percentage point cut by the end of the year. Meanwhile, San Francisco Fed President Mary Daly, another FOMC voter, expressed her belief that three rate reductions this year are a "reasonable baseline," although she emphasized that nothing is guaranteed.

Mester also provided insights into her perspective on the long-run federal funds rate. Instead of the long-standing expectation of 2.5%, she sees the neutral or "r*" rate at 3%. The neutral rate is considered the level at which policy is neither restrictive nor stimulative. This revision indicates that there are other members within the FOMC who are leaning towards a higher long-run interest rate projection.

Mester justified her stance by highlighting the limited wiggle room the Fed had to boost the economy when the COVID-19 pandemic hit, due to the very low rate at that time. The aim now is to carefully calibrate policy adjustments to economic developments, in order to avoid aggressive actions or overstimulation.

As the economic outlook continues to evolve, further data and economic indicators will play a crucial role in shaping the Federal Reserve's stance on interest rate cuts. Ultimately, the decision on when and to what extent the rate cuts will be implemented remains dependent on future developments and the broader economic landscape.