October 24, 2018 / 6:21 PM / a month ago

Prolonged market slump could bruise U.S. economy: Fed's Mester

FILE PHOTO: A Maersk Line container ship prepares to depart port in Long Beach, California, U.S. July 16, 2018. REUTERS/Mike Blake/File Photo

NEW YORK (Reuters) - A “prolonged” fall in U.S. stock markets could eventually begin to weigh on the U.S. economy, though there are no signs of pinched credit or a pending recession so far, Cleveland Federal Reserve President Loretta Mester said on Wednesday.

The sharp, nearly month-long drop in major equities indexes has not on its own caused Mester to adjust her expectation to continue gradually raising interest rates, she said, adding that for now data is pointing to a “strong” U.S. economy.

“If there was a prolonged downturn in the market and a pullback in risk across the board with a lowering of credit extension, then of course you’ll have” an effect on the data, Mester, who leans a bit hawkish relative to Fed colleagues, told the Forecasters Club in New York.

“I see it at a risk to the outlook, not something that changes my” expectation for about 3 percent economic growth this year and a bit less in 2019, she said. “Of course we’re going to monitor this. But I still don’t believe the fundamentals of the economy” are affected at this point, she added.

The S&P 500 sank for a sixth straight day on Wednesday as worries persisted over corporate earnings in the face of higher U.S. trade tariffs and a slowdown in China.

In response to a hot labor market and signs of inflation, the Fed has settled into a quarterly rate-hike cycle. But if the market sell-off, which included Treasuries earlier this month, carries on it could convince some Fed officials to shelve plans to keep tightening policy well into next year.

Reporting by Jonathan Spicer; Editing by Chizu Nomiyama and Tom Brown

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