Fed’s Mester sees a recovery or a ‘much more dire’ scenario as equally possible

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KEY POINTS
  • Cleveland Fed President Loretta Mester told CNBC that the economic recovery ahead could be quite slow.
  • She said activity is likely to rebound later this year, but also said it’s “equally probabilistic” that a “much more dire scenario” could take place.

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Cleveland Federal Reserve President Loretta Mester echoed Chairman Jerome Powell’s mostly pessimistic view on the economy, telling CNBC on Wednesday that while growth is likely to return by the end of the year, it could be slow.

The central bank official said during a “Power Lunch” interview that unemployment is still likely to be near or above 10% as the U.S. struggles to regain momentum lost during the national coronavirus-induced shutdown.

“We could see the economy start to reopen activity picks up some improvement over the second half of the year. But at the end of year, we are still going to have output below the level it was at the end of last year,” Mester said. That would entail an unemployment rate either in “double digits or high single digits” compared to the current 14.7%.

“So I agree that’s a reasonable outlook, but a number of things would have to fall in place for that happen. An almost equally probabilistic outcome is much more dire than that,” she added.

Earlier in the day, Powell delivered a speech in which he said the road ahead is “subject to significant downside risks” that likely will necessitate further policy response, primarily from Congress but perhaps from the Fed as well.

The Fed already has cut its benchmark lending rate to near zero and instituted a slew of liquidity and lending programs. Congress has passed more than $2 trillion in rescue funding and is deliberating a $3 trillion bill presented by Democratic House leaders.

Mester said getting policy correct is vital for a crisis that is hitting the most vulnerable Americans the hardest.

“So right now we’re in a situation where we really want to make sure that we’re doing all we can certainly at the Fed with our tools to make sure the economy is in as best a position as it can possible be in when the recovery starts and we see an increase in activity,” she said.

Also like Powell, Mester mostly dismissed the likelihood of the Fed using negative interest rates as a policy tool. Markets have been pricing in a slightly negative for the federal funds benchmark, even though officials have continually said that they don’t envision that happening. Both Mester and Powell cited a discussion at the October Federal Open Market Committee at which all members said they don’t envision below-zero rates.

Though she noted that “I don’t like to ever rule anything out,” Mester added that, “At his point, there’s no active discussion about. It’s not something I support at this time.”

The Fed currently targets the funds rate in a range between 0%-0.25% and it has been trading at 0.5% lately.

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