Fed's Mester Sees Economy Performing Well But Coronavirus a Risk

The U.S. economy should continue to perform well this year and monetary policy is currently well positioned, Cleveland Federal Reserve Bank President Loretta Mester said on Monday, as U.S. stocks hit three-week lows on worries the spread of the coronavirus to multiple countries outside China could pose an escalating threat to global growth.

“The economy has been performing well and I expect that to continue,” Mester said in prepared remarks to the National Association for Business Economics conference in Washington.

She did, however, note that she has incorporated the potential impact of the coronavirus as a downside risk to her forecast this year, which is for U.S. economic growth around 2%, solid job market gains and low and stable inflation.

“At this point, it is difficult to assess the magnitude of the economic effects, but this new source of uncertainty is something I will be carefully monitoring,” Mester said.

That echoed other Fed policymakers, who have so far stuck to the line that it is still too early to predict the economic impact on the U.S. economy of the virus, while showing cautious optimism any effects would be temporary enough not to warrant a change in the path of monetary policy.

Those hopes may not last. European shares suffered their biggest drop since mid-2016 on Monday and oil plunged almost 5% on the news of a jump in coronavirus cases in Italy, South Korea, Japan and Iran.

The U.S. central bank uses a range of factors in deciding where interest rates are headed, including financial market cues. An increase in financial market volatility often leads to tighter financial conditions.

Goldman Sachs cut its U.S. GDP forecast for the first quarter to 1.2% from 1.4% as it warned of potential production cuts should supply chain issues for U.S. companies linger into the second quarter.

Elsewhere in her speech, Mester said she sees the Fed’s preferred measure of inflation returning to the central bank’s 2% goal gradually over the next year or two and is not in favor of cutting interest rates to boost inflation.

“We have been undershooting our inflation goal for some time, so a natural question is whether policymakers should add even further accommodation to spur a faster return of inflation to our goal. I would not favor that at this time,” Mester said.

She added that doing so could generate imbalances in the U.S. economy and that the Fed should be particularly attuned to financial market developments in the current environment.