Bloomberg News/Landov
Cleveland Fed President Loretta Mester said Tuesday that while she still expects the economy to maintain its good performance this year, recent mixed economic data suggest there is “some chance” the economy stumbles, requiring interest-rate cuts.
In a speech in London, Mester said it was too soon to know for sure which path the economy will follow. The economy has proven resilient to a variety of shocks over the past decade, she noted.
Bond investors are putting a higher likelihood on this “weak growth scenario,” she noted. The yield on the 10-year Treasury note
TMUBMUSD10Y, -1.96%
is down 65 basis points this year.
“If I see a few weak job reports, further declines in manufacturing activity, indicators pointing to weaker business investment and consumption, and declines in readings of longer-term inflation expectations, I would view this as evidence that the base case is shifting to the weak-growth scenario,” Mester said.
This will call for interest-rate cuts, she added.
On the other hand, if the economy weathers this soft patch, Mester said she would not be in favor of lowering interest-rates just as a reaction to lower inflation readings seen over the past few months.
She said it was not clear how effective easier monetary policy would be given that structural factors may be holding back measured inflation. And cutting rates might just reinforce negative sentiment, she noted. Mester said she would rather the Fed be patient, as it was in 2016, and hold rates steady.
“This would mean maintaining a shallow policy path: keeping the funds rate at current levels for a while to support a gradual rise in inflation and not overreacting to shocks that might, for a time, move inflation somewhat above 2%,” she said.
Mester will be a voting member of the Fed’s interest-rate committee next year.
U.S. stocks have rallied on the prospect of interest-rate cuts as early as July. The Dow Jones Industrial Average
DJIA, -0.04%
has climbed about 15% this year while the S&P 500
SPX, -0.03%
just hit a record high.
Mester said the outlook is being clouded by uncertainty around trade policy and tariffs.
While the direct effects of the tariffs already imposed have been relatively modest, some multinational firms are reorganizing their supply lines to limit the effects on their cost of production.
“So the imposition of tariffs creates deadweight losses to the extent that the new suppliers are not as efficient as the old ones sans the tariff,” she said.
In the Cleveland district, some firms say they are beginning to reassess planned investment because of the trade uncertainty and others are holding off from starting new projects.
Source : MTV
