MNI POLICY: Mester Says QE Depends On Outlook, Economy Fragile

Cleveland Fed President Loretta Mester said Monday the future of QE depends on the path of a "fragile" recovery that needs time to develop because the pandemic hurts some industries far more than others.

"It's too soon at this point to predict if more accommodation in the form of asset purchases is needed and whether less is needed," Mester said in response to a question from MNI.

"I am happy with the changes in the [FOMC] statement that acknowledged that our QE policies were intended not only for market functioning purposes but accommodation."

With rates close to zero, the Fed is buying USD120 billion per month in Treasuries and mortgage-related assets to support the economy. Some Fed watchers think the next easing step should be to increase the pace of purchases, or to tilt them toward the longer end of the yield curve.

While the Fed has rolled out its new framework and added forward rates guidance, "that does not mean we are done on the communication front," she said.

FAR FROM GOALS

The Cleveland Fed leader indicated the new long-run statement and forward guidance should not be seen as a "simple rule" but as a guiding "heuristic" and Fed officials will have to continue communication on its thinking.

The economy is still in the re-opening phase and recovery "will take a while," Mester said. "If things turn out that the virus remains under control and there is a vaccine that is able to be distributed, in the middle of the year, say, then we'll see the recovery continuing and maybe broadening out a bit."

"There's one part of the economy doing really well and there's another part that is not doing well, and we still haven't seen how the economy will do without the fiscal support that we saw early in the pandemic," she said.

Unemployment has "come down a little more than I expected it to," she said. "But I am thinking it will be sort of in the 7-8% range" at the end of the year. Inflation could end 2020 just above 1%, she said.

"It's still far from both of our goals, I'd say, for both employment and inflation," Mester told reporters on a conference call.

"The economy is recovering but I still think it is a fragile recovery," said Mester. Interest rate sensitive sectors like housing and autos are doing well but travel, hospitality, leisure, restaurants are "doing less well," she said.