October 26, 2018

Fed's Mester Says Stocks "Far From" Level That Could Hurt US Economy

Earlier today we noted that a pressing question that has emerged among Wall Street traders following the recent market drop is at what level in the S&P would the "Powell put" be triggered and when could the Fed end its tightening cycle in support of equities  (with Goldman recently calculating that the drop in the S&P from its recent September highs is the equivalent of a little over one Fed rate hike).

Well, if Cleveland Fed President Loretta Mester is speaking for the broader FOMC - and the Fed Chair - don't hold your breath.

In a prepared speech delivered on Thursday evening in New York titled "The Economic Outlook, Monetary Policy, and Normal Policymaking Now and in the Future" she said that while she acknowledged that "longer-term interest rates moved up, and over the past couple of weeks, volatility in equity markets has increased", financial markets are "far from a scenario" in which falling equity prices would "dash confidence and lead to a significant pullback in risk-taking and spending" that could hurt the U.S. economy, and added that "the S&P 500 index remains higher than it was a year ago. Similar to the swings in the market we saw earlier this year, the movements of late do not seem to be signaling that investors are becoming overly pessimistic."

"While the market volatility poses a risk to the forecast and bears monitoring, it has not led me to change my modal medium- run outlook" she said, suggesting that the market has a long way to fall before at least this hawk pays attention.

Despite market gyrations, Mester said that she expects "growth to come in a tad above 3 percent this year and to be in the 2-3/4 to 3 percent range next year, well above my 2 percent estimate of the economy’s trend growth rate."

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