Loretta Mester has laid out the argument against a rate cut this month, while many of her colleagues are leaning hard toward it and investors assume it’s on the way.
The president of the Cleveland Fed, speaking Tuesday in London, said her baseline forecast calls for slower, but still solid, growth of around 2% in 2019 -- even as she acknowledged that downside risks are on the rise.
“Cutting rates at this juncture could reinforce negative sentiment about a deterioration in the outlook even if this is not the baseline view,” she said. A cut “could also encourage financial imbalances given the current level of interest rates, which would be counterproductive.”
Mester and any allies on the Federal Open Market Committee will have a tough job swaying their colleagues against a cut when they gather in Washington July 30-31.
Last month, when the committee signaled an openness to reduce rates, eight out of 17 policy makers indicated in forecasts that they expect to cut this year. Fed Chairman Jerome Powell may have revealed in his post-meeting press conference that he was among those favoring cuts.
Investors have taken the hint, with prices of federal funds futures contracts implying a 100% probability of a cut on July 31, including about a 20% chance of a half-percentage-point move as of Tuesday.
Responding to questions from the audience following her speech, Mester mostly brushed aside market expectations.
“We want to infer something from that, but some of it’s noise and some of it’s signal,” she said. “If you always react to the market, it’s self-reinforcing and you’ll never get a signal.”
Mester, a Ph.D. economist who has leaned toward the hawkish end of the FOMC since she took office in 2014, said the need for cuts hinges on the question of whether the economy is simply slowing toward a sustainable level of growth or headed for a more significant deceleration.
Weak Growth