Fed’s Mester: U.S. likely to avoid serious downturn; content to keep rates steady

Fed’s Mester: U.S. likely to avoid serious downturn; content to keep rates steady
imageEconomy41 minutes ago (Oct 10, 2019 05:41PM ET)

CLEVELAND (Reuters) – The U.S. economy will likely skirt a serious downturn despite current risks from trade and a slowing global economy, Cleveland Federal Reserve President Loretta Mester said on Thursday, arguing that absent evidence of a “material change” in the outlook the central bank should not cut rates any more.

Mester said that she opposed the rate cuts her colleagues approved in September along with the one in July but was content to maintain those lower rates “for a while” to support firmer inflation.

But her outlook was generally bullish.

Despite global weakness and recent signs the U.S. manufacturing sector was slowing, “the data indicate that the economy continues to perform well along a number of dimensions,” particularly with low unemployment, rising wages and strong consumer spending, Mester said in remarks at John Carroll University near Cleveland.

Mester like other Fed officials has been assessing whether the impact of global trade tensions, a consequent drop in business investment and slowing world and U.S. growth would turn into a more serious downturn.

“The question is whether the economy will remain resilient,” she said. While it was “not too difficult to envision” an outcome where firms trim capital spending and hiring, and undercut households as a result, “on balance, I continue to expect that we will avoid a more serious turndown in the economy,” with growth continuing and the unemployment rate remaining below 4 percent for the next two years.

While some Fed officials have argued even lower interest rates are needed to raise inflation closer to the Fed’s 2% target, Mester said she felt that “as long as labor markets remain strong, cyclical inflation should continue to firm, helping headline inflation return gradually” to the Fed’s target.

The Fed has cut rates twice this year, in July and September, lowering them to a range of between 1.75% and 2% Investors expect at least one more quarter of a percentage point rate reduction by the end of the year.

In sketching out her views, Mester appeared to place herself with a group of five Fed officials who feel rates will not need to change for the remainder of the year. Five have projected the need for a rate hike by year’s end, and seven for a further rate cut.

Mester does not currently have a vote on interest rate policy and thus could not join two others who dissented against the July and September rate cuts.

Fed’s Mester: U.S. likely to avoid serious downturn; content to keep rates steady

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