Fed’s Loretta Mester says virus is risk but policy patience appropriate

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Federal Reserve Bank of Cleveland President Loretta Mester said the worsening coronavirus outbreak represents a threat to the U.S. economy, but not one that yet justifies any change in monetary policy.

“At this point, it is difficult to assess the magnitude of the economic effects,” Mester said in the text of remarks she’s scheduled to deliver Monday in Washington. “I’ve incorporated it as a downside risk to my modal forecast,” which calls for economic growth of about 2%, healthy consumption and some pickup in business investment spending.

Loretta Mester
Federal Reserve Bank of Cleveland President Loretta Mester

U.S. equities tumbled alongside stocks in Europe and Asia as authorities struggled to keep the coronavirus from spreading more widely outside China. Fed officials have repeatedly stressed they are monitoring the situation but have so far signaled they are not considering another decrease in interest rates after three cuts last year.

“In my view, our current policy stance is appropriate given the outlook of growth near its trend pace, solid labor market conditions, and inflation rates not far” from the Fed’s 2% goal, Mester said.

Policy makers next gather March 17-18. Prices in fed funds futures contracts show investors expect two quarter-point cuts this year.

Mester, who is a voter this year on the Federal Open Market Committee, said she expects the U.S. economy to keep growing healthily, driven by consumer spending that’s supported by a 50-year low in unemployment.

The Cleveland Fed chief said it’s important for policy makers to make sure inflation returns to the Fed’s 2% target after missing to the low side for several years. But to get there she favors holding off on future rate hikes as opposed to cutting further.

“I support taking an opportunistic approach to raising inflation to our symmetric goal,” she said in a speech at a conference hosted by the National Association for Business Economics. “This entails leaving policy at current levels for a time to support a firming in inflation rates.”

“My current view is that monetary policy is well calibrated to support our dual mandate goals, and a patient approach to policy changes is appropriate unless there is a material change to the outlook,” she said.

Bloomberg News