Economic recovery may be ‘uneven’ in 2021, but Fed policy can likely stay unchanged, Mester says

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Economic recovery may be ‘uneven’ in 2021, but Fed policy can likely stay unchanged, Mester says


The U.S. economic recovery will be uneven in 2021, but Federal Reserve policy is supporting the economy and may not need to change at all, said Cleveland Fed President Loretta Mester on Monday.

“Policy patience will prove to be a virtue” Mester said, in a speech to the Maekyung-Korea-American Economic Association Forum.

In the near term, the surge in coronavirus cases is likely to weigh on economic activity this winter, Mester said.

But a slowdown in the first part of the year would not require more fiscal easing “so long as the medium-run outlook remains intact,” Mester said.

The medium-run view assumes that most people get vaccinated by September and economic activity will pick up, she said.

This return to growth won’t require the Fed to take its foot off the gas because “the economy will still be far from our employment and inflation goals,” Mester said.

Of course, if the economy evolves in a materially different fashion or if risks emerge, including those to financial stability, the Fed would be prepared to “respond appropriately,” the Cleveland Fed president said.

“There is still a high degree on uncertainty around the outlook, although some of the worst-case scenarios and downside risks have lessened over time,” Mester said.

Mester is not a voting member of the Fed’s interest-rate committee this year. Chicago Fed President Charles Evans, Atlanta Fed President Raphael Bostic, Richmond’s Thomas Barkin and San Francisco’s Mary Daly will be voting members this year.

Earlier Monday, Evans said he wanted Fed policy to shoot for inflation around a 2.5% annual rate to get the Fed to hit its 2% inflation target.

Mester said she expects inflation to gradually rise over the next few years.

The Dow Jones Industrial Average
DJIA,
-1.25%

and the S&P 500 index
SPX,
-1.48%

booked their sharpest daily drop in almost 10 weeks on Monday on concern over long-term interest rates may move higher as the economy recovers from the pandemic.



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