Cleveland Fed's Mester: market rout not impacting
economic outlook
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[February 13, 2018]
By Howard Schneider
DAYTON, Ohio (Reuters) - The recent stock
market sell-off and jump in volatility will not damage the economy's
overall strong prospects, Cleveland Fed president Loretta Mester said on
Tuesday in warning against any overreaction to the turbulence in
financial markets.
"While a deeper and more persistent drop in equity markets could dash
confidence and lead to a pullback in risk-taking and spending, the
movements we have seen are far away from this scenario," Mester said of
a market rout that cut more than 10 percent from major stock indexes.
That occurred, Mester said, only after a record-setting run, and "for
now, I expect the economy will work through this episode of market
turbulence and I have not changed my outlook. In my view, the underlying
fundamentals supporting the economy are very sound."

Her remarks to the Dayton Area Chamber of Commerce are an important
signal from one of the Fed policymakers who has voiced stronger concerns
about financial market stability and the prospects that the central bank
may risk a run-up in inflation by not raising rates quickly enough.
She said that as of now policy should tighten at a pace "similar to last
year's," when the Fed raised rates three times. The median outlook among
policymakers is currently for three rate increases this year as well.
Mester said inflation should pick up this year but not at a rate that
requires a faster Fed reaction as it gradually rises to the central
bank's two percent target.
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Cleveland Federal Reserve President and CEO Loretta Mester gives her
keynote address at the 2014 Financial Stability Conference in
Washington, U.S., December 5, 2014. REUTERS/Gary Cameron/File Photo

With a new chair taking over the Fed in Jerome Powell, the Fed's reaction to
recent market events, as well as to the new tax structure now in place, will be
closely watched.
Mester said the tax cuts should add between a quarter to a half a percentage
point to economic growth over the next couple of years, allowing the economy to
continue to grow above its 2 percent trend rate, and supporting continued
hiring.
But she said the longer-run effect remained uncertain, and in particular said
there was no clear sign that businesses would pump much of their tax savings
into new investment or jobs beyond what they were already planning.
"Except for firms in the tax consulting business, the majority of our business
contacts have told us that while they welcome lower tax rates, they aren’t
planning to make significant changes to their capital or hiring plans as a
result," she said.
(Reporting by Howard SchneiderEditing by Chizu Nomiyama)
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