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Cleveland Federal Reserve Bank President Loretta Mester said it’s too soon to determine whether the scenario of sustainable growth is still intact or whether downside risks are bringing a material change to the outlook and a policy rate cut would be needed.

“I prefer to gather more information before considering a change in our monetary policy stance,” Mester said in a speech in London Tuesday. “If I see a few weak job reports, further declines in manufacturing activity, indicators pointing to weaker business investment and consumption, and declines in readings of longer-term inflation expectations, I would view this as evidence that the base case is shifting to the weak-growth scenario.”

In that scenario, the short-to-medium-term equilibrium interest rate would move down and the policy rate “could need to move down with it” to sustain the economic expansion and aid the Fed’s goals of price stability and maximum employment, said Mester, who is an alternate member of the Federal Open Market Committee this year and a voter in 2020.

Mester said the US economy has proven to be resilient in the face of economic shocks and uncertainties and there have been similar episodes of soft data and sentiment that have turned around.

“Cutting rates at this juncture could reinforce negative sentiment about a deterioration in the outlook even if this is not the baseline view, and could encourage financial imbalances given the current level of interest rates, which would be counterproductive,” Mester said.

Mester said the current scenario bears resemblance to the 2014 to 2016 period, when slower global demand with lower oil prices and a strengthening US dollar “caused a drop-off in investment and manufacturing activity at the same time inflation was well below target.” In that period, the FOMC raised rates once in December 2015 and December 2016, she said.

 
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