Mester Says Premature for Fed to Materially Change Outlook

  • Recent market turbulence could affect outlook if it persists
  • Mester still expects the economy to warrant gradual hikes

Federal Reserve Bank of Cleveland President Loretta Mester said she continues to expect the U.S. economy to warrant gradual interest-rate increases, even after financial market turbulence spurred by a darkening outlook for global growth.

Recent developments pose “some risk to the outlook, but I believe it is premature to materially change” forecasts, Mester said in remarks prepared for a speech Thursday in New York. “While there is a possibility that a steeper, more persistent drop in equity markets could lead to a broader and more persistent pullback in risk-taking, which would negatively affect the outlook, so far we have not seen this.”

Mester is a voter this year on the policy-setting Federal Open Market Committee. Her remarks follow comments earlier on Thursday from Dallas Fed chief Robert Kaplan, who said it was premature to judge what officials would decide about rates at their meeting in March.

Fed Chair Janet Yellen and her colleagues on the FOMC voted to raise the benchmark federal funds rate in December for the first time since 2006. They left the target range for the rate unchanged between 0.25 and 0.5 percent when they met again January 26-27.

Soft Patch

So far this year, the Standard & Poors 500 stock index has fallen 6.3 percent amid sliding oil prices and increased concerns over global growth. Advance estimates released by the Commerce Department last week in Washington showed the economy grew at an annualized 0.7 percent pace in the fourth quarter, after expanding at a 2.0 percent pace in the previous three months.

“Until we see further evidence to the contrary, my expectation is that the U.S. economy will work through the latest episode of market turbulence and soft patch to regain its footing for moderate growth, even as the energy and manufacturing sectors remain challenged,” Mester said. “My current view is that economic conditions will evolve in a way that will warrant rates moving up gradually over time to more normal levels.”

Investors see only a 10 percent chance that the FOMC elects to raise rates when they meet in March, according to federal funds futures prices. The implied probability of another increase at any point this year is below 50 percent.

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