The president of Federal Reserve Bank of Cleveland on Monday said she was “comfortable with the current stance of policy” despite the risks to the global economy posed by the spread of the coronavirus.
“At this point, it is difficult to assess the magnitude of the economic effects,” Loretta Mester said in a speech, “but this new source of uncertainty is something I will be carefully monitoring. I’ve incorporated it as a downside risk to my modal forecast.”
Ms Mester, a voting member this year on the Fed’s rate-setting committee, is also the second US policymaker in a week to endorse a form of “average inflation targeting”, in which the central bank would allow inflation to rise above its 2 per cent target
Although the Fed has been clear it intends to leave short-term interest rates at 1.5-1.75 per cent this year, investors in the past week have increased bets on a cut, according to Bloomberg. The next scheduled Fed meeting is on March 17-18.
“The Fed has to be forward looking, and we have to just wait and see how things develop before we think about it in terms of a change in monetary policy,” she told reporters after her remarks. “You don’t want to overreact to the volatility in markets if you’re a monetary policymaker.”
In her remarks, Ms Mester said that with businesses more certain about trade negotiations, they should be more inclined to spend on new plants and equipment this year. But she added that “some long-lasting effects arising from the trade war are likely”.
“For example, some of our business contacts report that foreign firms have reoriented their supply chains away from US firms, which means these exports may be permanently lost,” she said.
At the same time, Ms Mester said other risks, such as the coronavirus, had grown. She declined to give any specific predictions on what might trigger a change in her policy stance, but noted that local contacts might be able to report new information before it would show up in economic data releases.
So far, she said, business owners in her district had said they had seen disruptions in supplies from China, but not yet in demand from inside the US.
Ms Mester added her voice to a growing chorus of policymakers calling for the Fed to allow inflation to run above target for a time, to make up for shortfalls. Although she would not add further accommodation now to move inflation up to its 2 per cent target, she would allow an “opportunistic approach” — neither hastening nor fighting an inflation overshoot.
“This entails leaving policy at current levels for a time to support a firming in inflation rates,” she said, “refraining from taking deliberate policy action at this point to try to lift inflation more quickly, and also refraining from taking deliberate action against shocks that would, for a time, move inflation somewhat above 2 per cent.”
Fed governor Lael Brainard endorsed a similar approach on Friday.