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The President of the Cleveland Federal Reserve Loretta Mester said on Monday that the US central bank’s policy of raising interest rates may not be suitable long-term.

Key Takeaways

• While acknowledging that the cautious approach to rate hikes is working for the time being, Mester stated if the economy performs as well as she expects it would be appropriate to introduce more rate hikes.
• The Fed left its target range for short-term interest rates unchanged last week at 2.25% - 2.5% and said that it would be patient in making any further adjustments.

Mester referred to the decision to leave short-term rates unchanged as “well-calibrated” to the overall economic outlook, going on to say that the economy is in a “very good spot” and likely to see growth of 2% - 2.5% in 2019. While this would reflect a cool down compared to last year’s growth, the expansion would still likely keep unemployment at or under 4% with inflation on target for approximately 2%.

Mester is known for taking a hawkish stance on monetary policy, and it’s interesting to see her support a dovish shift in the near-term. While she is not on the FOMC, her views could well be a reflection of voting board members, and her support for the current short-term policy as well as her positive outlook for the economy overall are worth noting.

The economy has indeed been expanding beyond expectations by many indicators, with huge growth in nonfarm payrolls massively outperforming even the most optimistic estimates last week.

Cleveland Fed Pres Mester on CNBC: "We're going to take the signals we're getting from the market ... and use that to inform our outlook and guide policy."

— Becky Quick (@BeckyQuick) January 4, 2019

Expert Outlook

“If the economy performs along the lines that I’ve outlined as most likely, the fed funds rate may need to move a bit higher than current levels” said Mester.

She acknowledged that there were also risks including the ongoing trade conflict between the US and China as well as a general slowdown in global economic growth, tightening financial conditions, and a dip in the confidence of US households according to a recent survey.

“If some of the downside risks to the forecast manifest themselves, and the economy turns out to be weaker than expected and jeopardizes our dual mandate goals, I will need to adjust my outlook and policy views.”

She stated that the rate “is now at the lower end of the range of FOMC participants’ estimates of its longer-run neutral rate, a level that neither stimulates nor restricts the economy and is consistent with maximum employment and price stability, and our most recent policy rate increases are still working themselves through the economy.”

Chief investment officer of BlackRock told Reuters that he believed the Fed is still hoping to implement some rate hikes this year, saying “The Fed would still like to get a hike or two done,” according to Rieder. “The markets’ interpretation is a bit extreme.”

Market Reaction

Spot gold continues to float comfortably above the $1,300/oz support line although posting some losses on the day, last trading down -0.14% at $1,315.03 with a high of $1,316.79/oz and a low of $1,311.07/oz.

Trump’s state of the union and today’s ISM manufacturing report may prove to create market-moving sentiment throughout the day.