MNI Fed's Mester: In Wait-And-See Mode on Tax Package

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Bank of Cleveland President Loretta

Mester told reporters Thursday she remains in a wait-and-see mode on the

potential effect of a tax reform bill to alter the economic outlook and

meanwhile continues to support gradual increases in the Fed's benchmark interest

rate. 

     Tax proposals can raise the underlying growth rate of the economy, she

said, but "It really depends on what gets passed," she said on the sidelines of

the Cato Institute's monetary policy conference. 

     Fiscal policies such as workforce development, productivity enhancements

and a "sensible reduction in regulation" such as simplifying the tax system, in

lieu of blanket tax cuts, would help jog growth over the long run, said Mester,

who votes on rates next year.

     "Depending on the mix it takes a while for those kinds of changes to

actually affect the economy," she said. 

     She added that she built in a small effect of a tax proposal into her

latest Summary of Economic Projections submission, "But that wasn't the

rationale I had for an upward tilting gradual increases in the funds rate. It

was based on fundamentals." 

     She continues to expect labor markets to be strong and inflation to reach

the Fed's 2% target by late next year. 

     Firms in her region have reported increasing wages in recent months, Mester

said, adding to the evidence that "We have seen a slight acceleration in wage

growth over the past couple of years." 

     However, she added, "I do think it'll be hard to see much more strong

acceleration in wage growth" due to a slower pace of improvement in

productivity. 

     "I do think that there's more evidence than just the aggregate measure of

wages to suggest they could pick up from where they are now," but that lower

productivity growth will cap that rate. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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