Cleveland Fed President Loretta Mester said Tuesday that the central bank’s impromptu 50 basis point cut amid coronavirus concerns still leaves the U.S. economy in the dark about what happens next.
“At this point, both the magnitude and duration of the economic effects of the virus are highly uncertain,” Mester said in a pre-scheduled speech in London.
But Mester said the rate cut enacted just hours earlier was needed to ensure the availability of credit to households and businesses.
“The action taken by the FOMC can help support confidence and ease financial conditions of indebted households and firms, thereby helping to mitigate potential demand-side impacts of the virus,” Mester said.
Thirty minutes after the market open on Tuesday, the policy-setting Federal Open Market Committee announced an unscheduled decision to lower the benchmark interest rate by 50 basis points. Last week, coronavirus concerns triggered a steep sell-off in equities market.
The last time a rate cut was announced outside of a scheduled meeting was in October 2008.
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Fed Chairman Powell said the cut was needed to “help keep the U.S. economy strong as we meet this challenge.”
The federal funds rate is now in a target range of between 1.00% to 1.25%.
Mester, the first major Fed official after Powell to speak publicly since that decision, spoke at a pre-scheduled event in London and cautioned that the rate cut will not reverse declines in tourism or supply chains.
“It was within this context that I supported today’s interest rate reduction, while recognizing that appropriate actions taken by other parties, including global public health officials and fiscal authorities, would likely do more to support confidence,” Mester said.
US economic fundamentals ‘remain strong’
Mester is a voting member of this year’s FOMC, and notably opposed all of last year’s three rate cuts enacted by the Fed to hedge against the trade war. Mester supported Tuesday’s emergency rate cut, which was approved unanimously.
On Monday, Feb. 24, Mester told reporters that she did not “want to overreact to the volatility in the markets,” adding that she would have liked to keep interest rates “at current levels for a time.”
Mester now says she finds the “extreme volatility” in financial markets as “noteworthy,” emphasizing the need for the Fed to ensure liquidity and funding in markets.
She applauded actions from the G7 central bankers and finance ministers, the group that issued a statement earlier in the day promising to “cooperate further on timely and effective measures.”
Mester said the U.S. economic fundamentals “remain strong.”
The Fed’s next scheduled policy-setting meeting will take place March 17 and 18.
Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.
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