Loretta J. Mester on rate cuts and the threats to the U.S. economy

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CNBC exclusive: CNBC transcript: Cleveland Federal Reserve President Loretta J. Mester speaks with CNBC’s “closing bell” today

When: today, october 4, 2019

Where: CNBC’s “closing bell”

The following is the unofficial transcript of a CNBC exclusive interview with Cleveland Federal Reserve President Loretta J. Mester on CNBC’s “closing bell” (m-f 3pm – 5pm) today, october 4th. The following is a link to video of the interview on CNBC.Com:

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CNBC's full interview with Cleveland Federal Reserve President Loretta J. Mester


Scott wapner: joining us now on set for a CNBC exclusive interview is another member of the federal reserve. Here to give her take, Cleveland fed president Loretta J. Mester. Nice to see you. Thanks so much for being here.

Loretta J. Mester: thanks for having me.

Wapner: you’re going to break the tie. Alright, you’ve got bullard one side, rosengren on the other. Is this an economy that needs more accommodation with an unemployment rate that hit a 50-year low today?

Loretta J. Mester: the economy is actually doing pretty well overall. You’re right, that employment report was a pretty good report. Unemployment rate is at a 50-year low. The job growth is pretty consistent with trend job growth and still above trend job growth but slowing from last year. Coming into this year, we knew that things were going to be slowing down, because we were above trend last year, pretty strong economy last year. Now, it’s really are we slowing more than that or not? And the headwinds that we’re getting on the trade side of things, on export growth, the weak growth abroad, of course, feeds into our export numbers. I think that’s a headwind that we have to take seriously and watch to see if that actually is gonna have a bigger impact.

Wapner: we’ve had two cuts thus far. Rosengren was kinda like, you know maybe we should see – it takes a while for this all to filter into the economy. If you had to say today, are you in favor of another rate cut or not?

Loretta J. Mester: I don’t have to say today. In fact, I won’t say today because I really think it’s important that we really look at the incoming economic information that we’re going to get as we work up to the end of the month meeting. And so I think this is a particularly important environment where you are very attuned to what’s the incoming economic and financial information telling you? What are your business contacts telling you about what they’re actually doing because of some of the uncertainty out there?

And then use all of that information as you walk into that fmoc meeting, so that you can bring that to the table. So let’s take the time that we have here to actually observe what’s going on in the economy. And eric’s right, the two rate cuts have not fed through into the economy yet.

Courtney reagan: the consumer had such an important part of the economy, 70% of course. We saw consumer confidence hit a 9-month low. But then I spoke to the ceo of best buy, and she said yeah, we’re concerned, but we haven’t actually seen a change in consumer behavior yet. What are you seeing from the consumer and are you worried it could change?

Loretta J. Mester: the consumer side is 70% of gdp, so that consumer spending number is important and so what I’m looking for is: are the weaknesses that we’re seeing in trade and in manufacturing going to spill over to the consumer? So far, we have not seen that and our business contacts are telling us that the consumer side is holding up. Yeah, you’re right, the data, the monthly data, there are some tweaks in there, but it’s still at a high-level, consumer confidence. It’s really what’s going to happen going forward. You could think of a scenario where there’s spillovers from the manufacturing weakness, the uncertainty over trade policy, that that kind of dashes the consumer, but if you think about the fundamentals—wages and income growth—have been holding up very well, the fundamentals underlying consumer spending still look good, and our contacts, our board of directors, bringing information about what they’re seeing on that side still say that things are holding up there on the consumer side.

Michael santoli: it seems that we’re at a time where there’s many different ways you characterize the inflation situation. I mean market-based measures of inflation expectations have recently gone to multi-year lows. And then whenever you get the official reports, people say well the median cpi, right the cleveland fed – it looks like the trends for the core are basically holding near 2%. How does that filter into the next rate cut decision or rate decision?

Loretta J. Mester: so it’s incredibly important that, you know, we get to our 2% goal, right, and that we maintain it and have it sustainably around 2%. My view of it is that, you know, we’re reasonably near 2%. Inflation expectations, I think, are at the moment well anchored. I think the market-based measures are a little hard to read right now, because we know that they’re term premia and it creates some risk premia in there. And the survey measures have been moving a little bit sideways. So again, I think my view is that inflation is going to gradually move up to 2%. I’m not going to overreact if we get it above 2% a bit.

I’m not going to overreact if we get it under and it’s really an issue of maybe we need to keep the funds rate we have, you know, more than otherwise because inflation has been running under, but not something that I would actively just change the path of the funds rate just because we’ve been running a little bit below two.

Wapner: is the economy softer because of the trade war or is it because your policy is too tight? That’s the larry kudlow view and he said it again today.

Loretta J. Mester: well, I think that you can easily look at growth abroad, so global growth is slowing, all right, trade policy has created uncertainty, and the tariffs have an impact, as well. I think those factors really account for some of the slowdown we’ve seen abroad and in the manufacturing sector in the u.S. And also the export side of the u.S. Economy. Now, when we’re thinking about monetary policy, we’re always looking forward, when we’re looking at our dual mandate goals and we’re going to calibrate policy to achieve those dual mandate goals but at the moment, our policy is accommodative and we’re going to assess the situation going forward and recalibrate our policy, if necessary, to make sure that we achieve and maintain those goals.

Wapner: would it bother you to take the fire from the president the way that the federal reserve has? He’s called you all clueless. He has, he used that word.

Loretta J. Mester: you know, I’ve worked at the federal reserve for my career. I feel privileged to be part of the federal reserve. I feel it’s a very honorable institution and when we go into that room and do our policy decisions, we are really focused on the dual mandate goal, the best analysis, the best information we have on the economy comes to that table. We bring it in from all parts of the country and we do the best we can and then we try to hold ourselves accountable for meeting those goals. And so that’s how you have to approach policy in these times. There’s always challenges out there and you just have to look through it and stick to the knitting and do your job.

Reagan: as you talk about that dual mandate, we’ve touched on inflation. We had a jobs report today. Many look at it as a goldilocks report. You could see some good, maybe some not so good. How do you read into that and how does it play into a potential fed decision?

Loretta J. Mester: I thought it was a pretty solid report we expected to see some slowing in job growth as growth overall, output growth, slowed this year. We are still above the estimates of what would be needed to keep the unemployment rate constant. So to my mind, that was a pretty good report. I’m attuned to the fact that there was a little bit of slowing in wage growth in that report, but again, I think we have to look overall and say that wage growth is still going to sustain consumer spending. But the focus is going to be on, can we maintain that good job growth and can consumers continue spending? And then we work through some of the softness on the business side.

Santoli: given the flow of data we’ve gotten in the last couple of months, the two easing moves the fed has made since the summer. Do they still qualify as insurance cuts, or are you fighting against a worse slowdown?

Loretta J. Mester: I think the decision going forward is, we came in expecting growth to be slowing toward trend this year. There are these headwinds out there, there are risks out there. Global economy is slowing down, manufacturing slowing down here. So there are downside risks on that forecast. And it’s always possible you could have a weaker growth than what you anticipated at trend. And that’s the decision – is growth going to weaken more than what we think, which is basically keeping growth at trend. So, that is what the assessment is going to be going forward. And I’m going to be attuned to whether we have a more sustained labor market slowdown or consumer slowdown. And that would be, to me, the things that I’m focusing on.

Reagan: you brought up risk and eric rosengren points to these coworkering companies, not calling out wework by name, but as a potential risk, looking at commercial real estate, wework obviously pulling their ipo. Is this a big risk for you or something more in the commercial real estate market that you’re watching?

Loretta J. Mester: I would say that when you’re in a low interest rate environment, you do have to be attuned to some financial stability issues that low interest rates for a long time can engender. We have seen elevated commercial real estate pricing, we have seen elevated levels of nonfinancial company debt. So you have to be watching those as you go through this cycle. Right now, I think those risks are moderate, but it is certainly something that you would have to be attuned for when you are in a low interest rate environment.

Wapner: you said yesterday, I believe at brookings, that you worry about what low rates can mean for financial imbalances, asset bubbles, things like that. Does that shape the way you view what the next move by the fed could be, at least as your vote would go? You worry about rates where they already are? And if you take them lower, whatthe ramifications could potentially be?

Loretta J. Mester: I think at this point, I don’t see that as being the predominant decision-making point in that.I’m really focused right now on what’s the outlook for the economy and what are the risks around that outlook. And then really gearing our policy to that. But I do think that we have to be cognizant of the fact that we could be engendering some risks where we do what’s good for the economy in the shorter run and then having a little bit problematic economy in the median run.

Santoli: do you think the stresses that we’ve observed in th eovernight funding market in recent weeks, that now seem to have calmed down, do the current kind of policies the fed has enacted seem like it’s taken care of that or is there something on a more sustained basis that you would expect?

Loretta J. Mester: well I think that we are going to be looking at this as we go forward, as the chair said, we’re constantly looking to make sure that we’re providing enough liquidity so that our funds rate is in the target – fed funds rate is in the target and that there is enough liquidity in the market. So this is an ongoing process that we always do when we’re trying to do, you know, implement our policy decisions.

Wapner: on that note, you have some suggesting – like jeffrey gundlach who I interviewed recently, who suggests that the fed is going to embark soon on “qe-lite” – what he calls “qe-lite” – maybe the balance sheet is going to start going the other direction again.

Loretta J. Mester: so what we’re talking about now has nothing to do with qe, right? Or asset purchases. This is really about supplying reserves so that the funds rate and the financial markets and the money markets can actually work. So, this is nowhere near anything about qe.

Wapner: well what about the idea of “qe-lite?” is there a chance that the fed may do that, go down that path? When you hear that kind of thing, how do you react? This is a well-respected investor who’s closely followed.

Loretta J. Mester: what I would separate out, monetary policy decisions from liquidity decisions and reserve supply decisions, those are two separate things, right? What the question was about, what was happening in the reserves market and the fed funds market, that’s about reserves and making sure that we have enough liquidity in the market so that, you know – a decision about what tool you use to hit your monetary – to go into your monetary policy, right now, interest rates are our main tool, as we have said.

Reagan: ok. Loretta Loretta J. Mester, cleveland fed president, thank you for joining us here today on “closing bell.”

Loretta J. Mester: thanks very much.

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