July 2, 2019 / 3:14 PM / 20 days ago

Fed's Mester says she needs more information to support rate cut

Cleveland Federal Reserve Bank President Loretta Mester speaks in London, Britain, July 2, 2019. REUTERS/Marc Jones

LONDON (Reuters) - A Federal Reserve policymaker on Tuesday expressed skepticism that a U.S. interest rate cut is the right move until there are more signs the economy is moving to a truly weaker path.

“I prefer to gather more information before considering a change in our monetary policy stance,” Cleveland Fed President Loretta Mester said in remarks prepared for delivery at an economics event in London that answers some colleagues of hers and the White House who are arguing for an immediate rate cut.

Markets also widely expect the central bank’s next move will be a cut by its July 30-31 policy meeting in light of weaker inflation and uncertainties including a U.S.-China trade war.

“It is not clear how effective this policy would be,” Mester said. “Cutting rates at this juncture could reinforce negative sentiment about a deterioration in the outlook even if this is not the baseline view, and could encourage financial imbalances given the current level of interest rates, which would be counterproductive.”

Mester does not have a vote on the Fed’s policy-setting committee this year but participates in its deliberations. She said she expects the “resilient” U.S. economy to turn in a strong performance again in 2019. But “a few” weak job reports, further declines in factory activity, weaker business spending and falling inflation expectations could build a stronger case that the U.S. is moving to a “weak-growth scenario” that could require more stimulus, she said.

After its most recent meeting, the Fed last month released economic projections revealing that nearly half of the 17 policymakers now showed a willingness to lower borrowing costs over the next six months. Fed Chairman Jerome Powell has said he and his colleagues are “grappling” with whether current risks to the economy warrant a cut of rates currently between 2.25%-2.50%.

Mester compared the forces at work today to those from 2014 to 2016, when there was a global economic slowdown, a decline in oil prices and a stronger U.S. dollar. The Fed raised rates once in December 2015 and once again a year later.

If the expansion seems to remain healthy, “I would favor taking a similar opportunistic approach to the recent softness in the inflation readings instead of trying to proactively move inflation up with rate cuts,” Mester said. “This would mean ... keeping the funds rate at current levels for a while to support a gradual rise in inflation and not over-reacting to shocks that might, for a time, move inflation somewhat above 2%.”

Writing by Trevor Hunnicutt in New York; Editing by Chizu Nomiyama

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