A top Fed official warns markets have gotten ahead of themselves in their enthusiasm for rate cuts in 2024

The next step isn't deciding when to cut interest rates, but deciding for how long tight policy will stay in place, Loretta Mester said.

• Fed official Loretta Mester said markets are ahead of themselves in their rate cut expectations.
• The next step is not when to cut rates, but to decide how long to keep policy restrictive, she said.
• Stocks have surged in recent weeks as investors grow optimistic for easing monetary policy.

Stocks are coming off their seventh consecutive week of gains, but Cleveland Fed President Loretta Mester said traders may be over their skis with their expectation for rate cuts early next year.

In an interview with the Financial Times published Monday, she warned that markets moved "a little bit ahead" of themselves on rate cuts in 2024, and that it's still too early to discuss easing.

"The next phase is not when to reduce rates, even though that's where the markets are at," Mester said. "It's about how long do we need monetary policy to remain restrictive in order to be assured that inflation is on that sustainable and timely path back to 2%."

US inflation slowed to 3.1% year over year in November, data showed last week, further stoking investors' hopes that rate cuts are imminent.

Mester's comments echoed those of her central bank colleagues John Williams and Raphael Bostic, who both said last week that lowering interest rates was not necessarily happening soon. 

The Federal Reserve kept rates steady at last week's meeting, but policymakers signaled that 2024 could see rate cuts of 0.75 percentage points, prompting futures markets to ramp up bets on easing policy.

Mester told the Financial Times she was among the officials who expect three 25-basis-point cuts next year. But according to CME's FedWatch tool, traders expect five rate cuts, starting as soon as March. 

Fed Chairman Jerome Powell, for his part, shared a dovish outlook, signaling that it's possible rate cuts come sooner than previously anticipated.

Meanwhile, in Goldman Sachs' view, cooling inflation will open the door for the Fed to cut interest rates five times next year. The world has entered a period of "Great Disinflation," which will enable policymakers to ease policy more rapidly, Goldman economist Jan Hatzius said Monday. 

"We see the committee delivering at least three back-to-back 25-basis-point cuts, probably in March, May, and June," he wrote in a note to clients. "Anything less would raise the question 'why bother?'"