Federal Reserve Bank of Cleveland President Loretta Mester said the central bank is unable to do much about slow long-term economic growth but can “do its part” by curbing inflation.
(Bloomberg) — Federal Reserve Bank of Cleveland President Loretta Mester said the central bank is unable to do much about slow long-term economic growth but can “do its part” by curbing inflation.
“While monetary policy cannot affect the economy’s long-term growth rate, it can do its part by returning the economy to price stability, which is necessary for the longer-run health of labor markets, the financial system, and the overall economy,” Mester said in the text of a speech in Dublin Tuesday.
The Cleveland Fed chief, known for her often-hawkish views, doesn’t vote on interest rates this year. Her speech focused on long-term trends and didn’t discuss the immediate outlook for interest rates or the economy.
She pointed out that economists and the Federal Open Market Committee have been revising down estimates of longer-run growth since the start of the Great Recession, and that over time, even small changes in gross domestic product can translate into large differences in average income per person.
When the FOMC began releasing longer-run economic projections in January 2009, the central tendency of the participants’ projections of longer-run growth in GDP was 2.5% to 2.75%, she said. In the projections released in March of this year, the central tendency was down to 1.75% to 2%.
“While these trends might get less attention in current policy discussions, they have significant implications for the future health of the US economy,” Mester said in remarks prepared for an event with the Global Interdependence Center hosted by the Central Bank of Ireland. “And while monetary policy cannot directly affect these longer-run trends, it needs to take them into account.”
“Policy economists often talk about the longer run as if it were a destination, but we speak less frequently about the factors that will influence what that destination will look like and how it will evolve,” she said. Those drivers include longer-run potential output growth, labor force growth, demographic changes, and productivity growth, she added.
Read more: Fed Officials Signal Rate Caution on Credit and Price Pressures
The FOMC raised rates by a quarter percentage point earlier this month, bringing its benchmark to a target range of 5% to 5.25% and signaling it may be ready to pause its tightening cycle at the next meeting in June.
Two Fed officials speaking on Monday signaled they favored pausing interest-rate increases, while a third policymaker said the central bank had more work to do to tame inflation.
Investors expect the US central bank will hold rates steady next month but begin cutting borrowing costs later in the year, according to pricing in futures contracts. Officials meet next on June 13-14.
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