Fed’s Mester sees downside risk from escalating trade war
Cleveland Fed chief warns of growing trade uncertainty in light of trade war
JACKSON HOLE, WYOMING: Cleveland Federal Reserve president Loretta Mester said on Saturday that she sees "big downside risk" from rising trade uncertainty and will be watching how businesses and consumers react ahead of the US central bank's next policy meeting.
Ms Mester, who opposed the Fed's interest rate cut last month, spoke a day after the US-China trade war escalated sharply, with Beijing and Washington slapping additional tariffs on each other's goods and US President Donald Trump calling on US companies to exit China.
Whether trade and other policy moves will knock a US economy chugging along at an expected 2 per cent annual growth rate remains to be seen, Ms Mester said on the sidelines of the Fed's annual central banking conference in Jackson Hole, Wyoming.
Ms Mester said she and her team of economists at the Cleveland Fed are still formulating their forecasts ahead of the central bank's Sept 17 to 18 meeting, at which it is widely expected to reduce borrowing costs for the second time this year.
"You want to be very cognisant of the fact that we are already at neutral, unless the economy takes a turn for the worse," Ms Mester said, referring to the neutral rate of interest that neither brakes nor boosts a healthy economy.
She added that "the more this trade war escalation happens, the more weight you have to put on that other (weak growth) scenario".
If there is a lot of uncertainty, particularly from trade, "a natural inclination for business or the consumer is, 'I've got to like, pause'", she said. "I think that is a big downside risk here."
On Friday, Fed chair Jerome Powell cited the trade uncertainty in a keynote speech to the conference in which he reiterated his promise that the Fed would "act as appropriate" to keep the economy growing, with unemployment low and inflation near the central bank's 2 per cent annual target.
He did not tip his hand on whether he thought rate cuts at the Fed's next policy meetings would be appropriate, as financial markets are betting.
Ms Mester said she would be "open-minded" on the rate-cut debate, focusing on "economic and financial market reconnaissance" including a close look at what business contacts are saying and doing.
"We have three weeks: We are going to gather more data, we are going to look at what the economy is," she said, adding that she will be focused on whether declines in business sentiment are translating into real actions that slow the economy.
- REUTERS
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