By Greg Robb, MarketWatch
The COVID-19 outbreak is a risk to the U.S. economy but it is likely that the economy will continue to perform well this year, said Cleveland Fed President Loretta Mester on Monday.
“At this point, it is difficult to assess the magnitude of the economic effects [from the outbreak of COVID-19], but this new source of uncertainty is something I will be carefully monitoring,” Mester said in a speech to the National Association for Business Economics conference.
“I’ve incorporated it as a downside risk to my modal forecast, which calls for growth to continue at trend, slightly slower than the pace of last year, with continued healthy consumption growth and some pickup in investment spending,” she added.
Mester is a voting member of the Federal Open Market Committee this year. The rate-setting group will meet March 17-18.
Many economists say the pace of growth of COVID-19 cases outside of China makes it more likely the Fed will have to cut interest rates in coming months from a current 1.50%-1.75% range. Many see a move as soon as April.
The Fed cut rates three times in a row last year but has maintained an “on-hold” policy over the past several months.
In her speech, Mester discussed calls for further easing that have come from economists who have separately argued it might help to boost inflation up to the Fed’s 2% annual target.
“We have been undershooting our inflation goal for some time, so a natural question is whether policymakers should add even further accommodation to spur a faster return of inflation to our goal. I would not favor that at this time,” Mester said.
“I am comfortable with our current stance of policy,” she added. “A patient approach to policy changes is appropriate unless there is a material change to the outlook,” she said.
Further easing has some risks, the Cleveland Fed president said, in the form of potential asset bubbles.
Easing policy “would raise the risk of generating imbalances that would threaten the expansion,” she said.
“Even given the low level of interest rates, equity prices and commercial real-estate valuations are elevated; corporate debt levels are high; and underwriting standards on leveraged loans are weak,” she said, saying this called for the Fed to remain attuned to financial market developments.
U.S. equity benchmarks have fallen sharply on elevated coronavirus fears. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.07% plunged over 3.6% on Monday.
In comments to reporters after her speech, Mester said the sharp market selloff was “one day” and the Fed should not overreact.
“We have to wait and see how things develop. You don’t want to overreact to volatility in the market,” she said, adding that she wasn’t worried the Fed would be too slow to react, if necessary, or what’s known as being “behind the curve.”
Mester said some of the risks facing the economy last year has eased, especially on the trade front. In its place, the risk from coronavirus has emerged. So far, that risk remains opaque.
Contacts in the Cleveland Fed so far say the effect of the virus has been on the supply side and there has been no pullback in consumer demand.
“I see [the virus] as a risk to my outlook, but the fundamentals underlying the U.S. economy are still strong enough to support trend growth,” she said.