MNI POLICY: Fed's Mester: Too Soon To Change Policy Path

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Bank of Cleveland Loretta Mester said

Tuesday she needs to see a further deterioration in data before considering

lowering interest rates, warning that "cutting rates at this juncture could

reinforce negative sentiment about a deterioration in the outlook even if this

is not the baseline view." 

     Her baseline outlook remains positive, but "a few weak job reports, further

declines in manufacturing activity, indicators pointing to weaker business

investment and consumption, and declines in readings of longer-term inflation

expectation" would convince her that the base case is shifting to a weak growth

scenario, Mester said. 

     That would warrant lower rates to sustain the expansion, she said in

remarks prepared for the European Economics and Financial Centre in London. 

     The following are other major takeaways from her speech: 

     --Mester revised down her inflation forecast for the year though she

continues to expect inflation to return to target slowly over the next couple

years. Recent inflation readings reflect some "idiosyncratic, and likely

transitory" declines in categories including apparel and financial services.

Indicators of underlying inflation trends have been more stable and point to

inflation gradually rising back to trend.

     --Recent declines in inflation expectations bear watching, though the data

has been mixed over the course of the expansion. 

     --Trade uncertainty clouds the outlook for growth and the concern is

growing. Tariffs would be a one-time change to price levels, but to the extent

it shifts expectations on inflation higher, it might exert upward pressure on

inflation as well. 

     --A global slowdown is weighing on the U.S. outlook and contributed to the

recent slowdown in business investment. 

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

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