MNI POLICY: Mester: Fed Is Not Behind The Curve On Coronavirus

By Evan Ryser

     WASHINGTON (MNI) - Cleveland Fed President Loretta Mester said the Federal

Reserve isn't behind the curve in reacting to the coronavirus, speaking as

stocks had the worst day in two years and Fed funds futures priced in a greater

chance of rate cuts. 

     The benchmark rate is now "well-calibrated" but a worst-case scenario would

call for the Fed to cushion the economic blow from coronavirus, she said Monday

in Washington.

     "We don't want to overreact to the volatility in the market," she said. "We

certainly want to take into account what is happening in financial markets and

we will assess what financial conditions will be going forward, but I don't

think it is right to take one day and then extrapolate." 

     Mester spoke to reporters after a speech that said the economy has been

growing faster than potential and policy makers can be patient in assessing the

impact of three cuts made last year. Most other comments in recent weeks from

FOMC policy makers have also stressed the economic damage may not expand much

beyond China and growth could return to normal soon after the health situation

is contained. 

     "I personally don't have fear that we will be behind the curve," Mester

said. "The kind of analysis that we are going to be doing is to try to be very

careful and deliberative of evaluating those risks and making decisions on those

evaluations."

     Most business contacts are indicating that the impacts are mostly on the

supply side while demand remains intact, she said, suggesting the willingness to

spend is more of a barometer. Mester said she will be speaking with business

contacts who provide a forward-looking view, when official statistics will show

the coronavirus impacts "with too much of a lag." 

     "It will depend on really what the mechanism through which the virus is

affecting - whether it is pullback in demand versus a change in supply

functions," she told reporters on the sideline of the annual NABE conference.

"It will depend on how large the impact is and, as important, how long-lasting

it is." 

     On the demand side "things are good," with a labor market "pretty much" at

full employment, and strong fundamentals more generally, she said.

     There are scenarios that would require Fed action, and monetary policy

could "cushion" the impacts from the coronavirus, she said, without elaborating.

     On the topic of the Fed's framework review, Mester said she would be

willing to see inflation move above the 2% symmetric objective but she would not

be supportive of changing that target. 

     The Fed, Mester said when speaking on the repo markets, should "think

through" a standing repo facility. She said "having something there that would

be an automatic cushion" would be useful.

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

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