MNI INTERVIEW: More Cuts Before Fed Fine-Tunes Neutral -Mester
Former Cleveland Fed president discusses the U.S. monetary policy outlook.
The Federal Reserve can get a few more rate cuts under its belt before officials need to pin down where interest rates will ultimately land, former Cleveland Fed President Loretta Mester told MNI, adding economic data since the September FOMC meeting have shifted the risks to the outlook but not baseline expectations.
"The baseline is we've gotten to a point now where we're within striking distance of both parts of the mandate, and now it's time to move rates toward a more neutral stance," she told MNI's FedSpeak podcast, adding there's good reason to think the neutral rate is higher now than before Covid. FOMC officials projected a wide range from 2.4% to 3.8% for the longer run fed funds rate last month.
"We do know that policy right now is above that level, so there can be a few more (cuts) before you need to really be concerned — because neutral is much higher than it was before. I think we have more to go before the Fed has to worry about that exact fine-tuning," she said.
The timing of the next cut may be another close call, given how divided the committee was over September's jumbo move and dissipating fears of a pronounced job market slowdown, but Mester said she favors consecutive cuts.
"I personally think you'd want to follow through with another cut or two, because otherwise it really looks like you're just dependent on one or two reports," she said. "And frankly, the reports that have come in since September I don't think have materially changed the medium run outlook for the economy. Nor have they really shifted the risk significantly enough that once you started saying you want to move toward neutral, you wouldn't do another one." (See: MNI POLICY: Fed To Scale Back To 25BP As US Outlook Stays Rosy)
ROBUST DISCUSSIONS
The minutes of the September meeting revealed Fed Chair Jerome Powell's desire to recalibrate policy for an economy that had seen inflation retreat and unemployment at risk of accelerating, Mester said.
"He thought it was proper and better to do 50 and people want to support the chair," she said. "In times like this, where you're balancing both risks, it's very natural that you'd expect different people to have different views, either because they have different outlooks from where the economy is going, or they have different balance of risks around those two parts of the mandate" .
The September jobs report took away some of the downward risk on labor markets, while the CPI report showed a little more risk on the inflation side, she said.
"I do suspect they're going to have robust discussions about whether we should go ahead (with a November cut) or not," she said.
UPSIDE INFLATION RISK
The committee's overall assessment of the balance of risks on inflation moved to neutral at the last meeting. But the escalating conflict in the Middle East and its potential impact on oil prices, easier financial conditions and the strength of the U.S. economy and the latest inflation report all point to more upside risk, Mester said.
"It's certainly not in a bad place, given where we were, but it's something that I think the Fed needs to to look at," she said.
On the labor market side, Powell has been clear the FOMC does not want to see any further deterioration in jobs, but that doesn't necessarily mean they draw a red line at a slight increase in the unemployment rate, especially if it's driven by rising participation, Mester said.
"We still want to see healthy growth in terms of payrolls and hours worked and things like that. So they're trying to balance that at the same time making sure that they keep policy in the right place to get inflation down fully back to 2%."