Fed's Mester sees Fed funds rate 'somewhat above' 4 per cent in early 2023

Nevertheless, in remarks prepared for a speech, the head of the Federal Reserve Bank of Cleveland also said her outlook for rates was based on her "current" reading of the economy and how it was set to evolve.

"[...] The peak fed funds rate will depend on the inflation outlook, which depends on the assessment of how rapidly aggregate demand and supply are coming back into better balance and price pressures are being reduced," Loretta Mester said.

"It would be a mistake to declare victory over the inflation beast too soon. Doing so would put us back in the stop-and-go monetary policy world of the 1970s, which was very costly to households and businesses," she added.

Instead, Mester said she would be looking for "compelling" proof that price gains were headed back down towards the Fed's 2.0% target.

According to her remarks, several months of declining month-on-month inflation readings were what would lead her to conclude that the peak in inflation was in the rear-view mirror.

The central banker also said that she would be closely watching gauges of inflation expectations, particularly those spanning the medium to longer term.

Mester also noted the possibility that gas prices might rise again due to the uncertainty around global oil supplies.

So too, food prices might remain high.

"Research indicates that changes in the prices of particular salient items, including gasoline and food, can have an outsized effect on households’ inflation expectations."