Fed’s Mester says markets’ focus on interest-rate cuts is premature

Mester said she still needed to be convinced that inflation is coming down “in a timely way.”

“I’d be concerned if we’re in a situation where inflation stalls at 3%, for example,” she said.

In the wake of the soft consumer inflation data released Tuesday, markets have pulled forward the first rate cut to March and are now pricing in 100 basis points of easing next year.

Asked if the markets were crazy for this move, Mester demurred.

“They have an outlook. We have our outlook,” she said. “Our job is to take the panoply of data out there, and we’re not going to react to one data release.”

The Cleveland Fed president said she didn’t support adoption of “triggers” in the economic data that would have to be hit before the Fed lowered its benchmark rate. She was referring to the Fed’s decision in 2012 to keep interest rates close to zero until unemployment improved and inflation picked up.

During this period, as the economy recovered from the Great Recession, financial markets went through bouts of expecting the Fed to begin to raise rates from close to zero. The higher market rates actually made the economy weaker. So the Fed committed to keeping rates near zero as long as the unemployment rate was higher than 6.5%.

This time is different, Mester said.

“My feeling is that in this [current economic cycle], we just need to see evidence that inflation is on a downward path,” she said. “It would be hard to put triggers or that kind of precision on one or two data points.”

The Fed has held its benchmark rate at a range of 5.25% to 5.5% since late July. Fed officials will meet again from Dec. 12 to Dec. 13 to set interest-rate policy.

Overall, Mester said she was pleased with the data from October’s consumer price index but said it wasn’t an all-clear report.

Stocks
DJIA

SPX
were lower in afternoon trading Thursday, while the yield on the 10-year Treasury note
BX:TMUBMUSD10Y
slipped to 4.45%.