Federal Reserve Hawkish: Interest Rates Not Significantly Restrictive, Stock Market Valuation High

On February 28, hawkish Federal Reserve official and Cleveland Fed President Loretta Mester stated that interest rates have not yet become significantly restrictive and should remain stable for a period of time. In other words, we may be close to a neutral environment. In the long run, the U.S. economy is resilient and will adapt to higher interest rate environments given that the broad financial environment remains loose with high stock market valuations where equity risk premiums are close to zero. Her remarks conflict with those made by Federal Reserve Chairman Jerome Powell last month who said that after last year's rate cuts, interest rates still have substantial restrictiveness. Mester also noted that a patient approach would give us time to monitor labor market trends and inflation trajectories as well as overall economic performance under current interest rate conditions. It is important to monitor inflation expectations and other indicators in order to assess whether financial conditions align with the Fed's anti-inflation efforts. Following her speech, U.S stocks extended their losses with NASDAQ falling more than 2.3% at closing bell. Mester will be an FOMC voting member next year.