Exclusive: the Fed's weighty argument for reducing the US rate



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CLEVELAND (Reuters) – A Federal Reserve decision maker who opposed the Fed's recent rate cuts questions whether to back such a move, given the risk of a trade war between the states. And China and a global slowdown could derail the economy.

FILE PHOTO: Loretta Mester, President of the Cleveland Fed, participates in a roundtable convened to debate the health of the US economy in New York City on November 18, 2015. REUTERS / Lucas Jackson / File Photo

"I could see scenarios in which we kept stable rates. I could see scenarios where we lower the rate. I think we just need to take the time to really evaluate, "said Loretta Mester, president of the Cleveland Fed, during her first public address since the Fed had cut borrowing costs for the first time since 2008 .

Mester said that she still expected the US economy to grow in line with its long-term potential this year, with inflation reaching the Fed's target of 2% per annum, but the risks for this perspective are serious and "down-weighted".

Nonetheless, fairly solid economic data, particularly in the labor market and inflation, led Mester to refrain from supporting what it described as an "imminent decision" to cut rates despite signs of lower spending by governments. slowdown in the manufacturing sector.

"A constant rate maintenance strategy would have been my favorite strategy at the time, but it's a close call," she said. "Holding good, depending on the economic context, could actually be a stricter policy."

Markets generally expect the Fed to lower its rates when it meets from September 17 to 18. The recent decline in long-term treasury rates relative to bonds maturing earlier, an unusual event called "inversion of the yield curve," preceded recessions in the past and marked a period when Fed policy could have been too restrictive.

But Mester said the flight to safe assets in the light of the US-China trade conflict and concerns over the global slowdown also drove bond prices and the reversal did not last long enough to necessarily predict recession.

"It's hard to read a strong signal from that, but you do not ignore it," Mester said.

Mester has no vote on the Fed's policy-making committee this year, but is participating in its deliberations. Boston Fed President Eric Rosengren and Kansas City Fed President Esther George opposed the July rate cut.

For now, "the key question" is whether to lower or keep rates where they are, and Mester said she was looking for signs that consumer spending is slowing down, which could indicate a more serious slowdown.

"I will take all this time between meetings to make a very good assessment before determining where the policy is," she said.

Report by Trevor Hunnicutt; Edited by Chizu Nomiyama

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