MNI POLICY: Mester: Coronavirus To Weigh On US Growth Thru H1

--Surprise Fed Rate Cut May Prevent Supply Shock From Hitting Demand Too

By Evan Ryser

     WASHINGTON (MNI) - Cleveland Fed President Loretta Mester said that while

some coronavirus impacts can't be undone by lowering interest rates, she

supported Tuesday's surprise 50bps cut to boost confidence and sustain demand.

     "Trade and supply chain disruptions, travel spending cuts, and declines in

consumer and business sentiment will also weigh on U.S. growth at least in the

first half of the year, as will the extreme moves we have experienced in U.S.

financial markets," Mester said. She is the first FOMC voting member to speak

since Chair Jay Powell's press conference announcing a surprise cut that echoed

the 2008 financial crisis. 

     "Heightened and persistent uncertainty from the coronavirus that is

clouding the outlook for the global economy could evolve from a supply shock

into a demand shock," Mester said. 

     "It was within this context that I supported today's interest rate

reduction, while recognizing that appropriate actions taken by other parties,

including global public health officials and fiscal authorities, would likely do

more to support confidence and spending," she said according to prepared remarks

to the Society of Professional Economists.

     The extreme volatility in financial markets is "noteworthy," she said.

"When a shock like this hits financial markets, the first task of central

bankers is to ensure that there is sufficient liquidity and funding to allow

markets to continue to function in an orderly way in the midst of extreme

volatility, and to assure the public that they are prepared to act as

necessary."

     Speaking about the Fed's framework review due out in the middle of the

year, Mester said tools including forward guidance and balance-sheet policies

such as longer-term asset purchases will need to be used "more often" going

forward when interest rates are so low they limit monetary policy space.

     Mester noted that the FOMC did not use negative interest rates during the

Great Recession and its aftermath, but the "review is open minded and we are

taking a look at the experience of other central banks that have used negative

interest rates to address low inflation and low growth."

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

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