Loretta J. Mester On The U.S. Economy And The Fed Policy

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First On CNBC: CNBC Transcript: Cleveland Federal Reserve President Loretta J. Mester Speaks with CNBC’s Steve Liesman from Fed Summit in Jackson Hole, WY Today

WHEN: Today, Friday, August 23, 2019

WHERE: CNBC’s “Squawk Box” – Live from the Fed Summit in Jackson Hole, Wyoming

The following is the unofficial transcript of excerpts from a FIRST ON CNBC interview with Cleveland Federal Reserve President Loretta J. Mester and CNBC’s Steve Liesman on CNBC’s “Squawk Box” (M-F 6AM –9AM) today, Friday, August 23rd, live from the Fed Summit in Jackson Hole, Wyoming. The following is a link to the interview on CNBC.com:

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Watch CNBC's full interview with Cleveland Fed President Loretta J. Mester


STEVE LIESMAN: Andrew, good morning. Thanks very much. I’m here with Loretta J. Mester, the Cleveland Federal Reserve Bank President. And I guess there’s a few things to talk about this morning.

LORETTA J. MESTER: Just a couple.

STEVE LIESMAN: Thanks for joining us. Give us your take. I know this news just broke. $75 billion of tariffs. The market came down. And then, I think we had another drop – we were up at 164, 165 on the ten-year, now it’s back down to 161. How do you, as a policymaker, react to this tit for tat when it comes to the trade war?

LORETTA J. MESTER: Yeah, I mean, the trade uncertainty and the uncertainty over policy has been with us for a while. This is just a continuation of that. And as you know, this is one of the down side risks to the U.S. economy. We’re less exposed than Europe to some of the trade – we’re more insolated a little bit. But it’s certainly been weighing on business sentiment and on some of the investment numbers that we’ve been seeing, which as you know, have been weak. On the other hand, the consumer side continued to be good and we had some positive numbers there. So, we have this weakening of the business side in manufacturing. At the same time, strong labor markets and strong consumer sector.

STEVE LIESMAN: Do the tween have to meet? Can we co-exist to this idea of this weak manufacturing sector, weak global economy, keep going with a strong consumer and a reasonably strong U.S. economy?

LORETTA J. MESTER: Well, it’s possible. But one of the things I want to be, I’m attuned to right now is: if businesses really take a step back on their spending in terms of investment, will that spill over to hiring.? And that’s the linkage then to the labor markets and consumer spending. So, I’m very particularly focused on what’s happening on the consumer side of things.

STEVE LIESMAN: So, two developments on the jobs front. One, yesterday, they call it the desert island indicator. If you could only have one indicator on the U.S. economy, it would be jobless claims. I don’t know if you feel that way, but it’s the way I feel about it. Down to 209,000. No indication of weakening in the jobs market, and yet, we have the benchmark revisions that came out from DL showing that the employment level in 2019 is going to be reset 500,000 jobs lower. What kind of signal do you get from that about the jobs market?

LORETTA J. MESTER: Yeah, I mean, not much, because remember, growth was also lower. Right? So, you have sort of that pass – a little bit slower growth, a little bit slower job growth. Coming into this year, we knew that, you know, things were going to be a bit slower, but slower towards trend. Right? And so, now what we’re assessing is – or what I’m looking at is -- are we slowing towards trend? Which is what the forecast has been and what has been my modal forecast. Right. And accompanying with that, we’ll see some slowing in job growth. But still above trend job growth. And inflation gradually moving up to 2%. Or, are we entering a scenario that’s a weak growth scenario? In which case then you’d see a weakening consumer side. You’d see more, we’d pullback in employment. And then, in that case, right, you’d need to recalibrate your monetary policy.

STEVE LIESMAN: Right. So that’s an awesome question.

LORETTA J. MESTER: Exactly. That’s an awesome question.

STEVE LIESMAN: How do you answer it?

LORETTA J. MESTER: So, I think that’s what we’re all looking for. And that’s why the risks, right, the global weakening and global growth, as well as a trade policy uncertainty and actually the imposition of potentially of tariffs on the consumer side are so relevant for the U.S. economy. And you know, we have a few more weeks before the next FOMC meeting. I’m going to take that time to really look at the data that comes in over that period. We have seen the U.S. economy be quite resilient. And so that’s why I think we’re in this uncertain time, why you would see different policymakers having different views going forward.

STEVE LIESMAN: There seems to be a lot of different views. More so than usual. Both in the reasons to cut rates: Inflation, weak use economy, and in the reasons to keep them the same: concern about excess leverage. So, two-part question here. Did you think the Federal Reserve should have cut rates last time? Do you think it ought -- what do up think it ought to do next?

LORETTA J. MESTER: So, I saw the arguments on both sides. I think they were very cogent arguments. I supported leaving rates the same and, you know, looking for more data and letting things play out a little bit longer, so that we would have a better view of whether we’re in a weak gross scenario or in a trend growth scenario. I’m considering, I haven’t made up my mind before I go into that FOMC meeting. I think the dialogue around that table is very, very useful. You hear what’s going on in other parts of the country from my colleagues around the Reserve Banks, you hear the Board of Governors their views, individual views as well. And that discussion really is a good way of making policy. So, I’m open-minded about it. At this point, if the economy continues where it is, I would probably say we should keep things the way they are. But I am very attuned to the down side risks of this economy and I want to make sure that we’re always focused on our dual mandate goals. So, when I go in there I’m always thinking about what’s the data telling me where we are? What’s the data telling me about where the economy is going relative to the two goals we have? Which is surprise stability and full employment.

STEVE LIESMAN: How do you factor in what happening around the world? And again, this is another two-part question.


STEVE LIESMAN: One, not unrelated, one is the low global interest rates. The U.S. is 200 basis points, 2 percentage points plus, higher than Germany.


STEVE LIESMAN: Is that right? I mean, that kind of just, distance between the two seems unusual?

LORETTA J. MESTER: Interest rate differentials, as you well know, reflect differences in the outlook for the economies. We’ve had a stronger outlook here than in other countries in Europe and China. So, our interest rates should be higher than there. But, you have to take a signal from what’s going on with U.S. yields. I think the signal is probably not as strong as it has been in the past. Because there are other factors affecting the long end of the curve. In particular, when you have uncertainty out there we have in the global economy, we’re safe haven assets. Both the dollar and long bonds. You see some of that. So the signal is a little murky there. But you have to take into account, when you’re thinking about, is that telling you something? Bond investors obviously have a more pessimistic view of the U.S. economy than some economists do – private sector economists and policymakers. So, you want that -- that’s one piece of information that you take into account. But you have to look at the real data on the economy. You have to look at really what’s going on on Main Street. And in talking to our business contacts, they are always mentioning the trade uncertainty as really weighing on sentiment. At the same time, many if the firms say that, ‘You know, business is still good. We’re getting orders. You know, we’re following through on our plans for investment.’ It’s not as good as last year but we knew it coming into this year things would be a little weaker because last year was so strong.

STEVE LIESMAN: Businesses can respond in two different ways. They can cut back on capital spending. They can also cut back on their hiring. Have you been surprised that we’ve seen a slowdown in capital spending, perhaps related to the trade problem, but not in hiring. Why hasn’t it shown up there?

LORETTA J. MESTER: Well, labor markets are so tight. I mean, so, a lot of our businesses were wanting to hire more labor, and they just couldn’t find workers. And, so, there’s been some recalibration there. Wages have been moving up, which is a great thing. Workers have been coming back into the labor force as the strength has continued. So, there has been a little bit of recalibration as, you know, some growth in terms of the investment side has come down, you’ve seen that some firms are readjusting their plans in terms of hiring. But not really. And so, in some sense, the labor market still remains strong. You know, people are continuing to spend. And that’s the positive in this economy. That’s why I think it makes sense to continue to look at that hard data and see where the economy is going.

STEVE LIESMAN: Do you worry that by the time it shows up in data it’s too late?

LORETTA J. MESTER: Not really. Because that’s why it’s so important to have the reserve banks out there talking to the real employers who are out there. We have labor, people attuned to filling jobs, and temporary workers. We talk to businesses that are involved in hiring across the service sectors and manufacturing. And so, that’s really the kind of -- when I say data, right, I’m talking about that kind of evidence as well. It’s not necessarily in the official statistics yet, but it’s in our business contacts and the anecdotal reports that we’re get from Main Street.

STEVE LIESMAN: Shifting topics a little bit, President Mester, the President consistently criticized the Federal Reserve. Called the Fed clueless in one tweet. The Fed is generally not responded. Last night Esther George talked about wildlife out here and she said the different species co-exist best when they stay in their own territory and that usually when there’s a conflict, the conflict is solved when the intruder retreats back to their territory. Is it time? Is there a reason? Should the Fed be responding to what the, the criticism from the President?

LORETTA J. MESTER: So, when you have the privilege of working for an institution as honorable as the Federal Reserve, you have to take on the challenges that that imposes on you. But the challenges also have opportunities. And, I think the opportunity offered to us is to, one, right, be out there explaining how we approach monetary policy, what factors we use people to determine where monetary policy should be, and to remind people, we’re always trying to set policy to achieve our dual mandate goals but we’re also accountable for those decisions. And I think that’s the best approach we can have when people question how we go about doing our business. We are always focused on where the economy is headed in terms of our best analysis and are we setting policy to achieve those dual mandate goals?

STEVE LIESMAN: Which sounds like you’re saying no percentage in responding to the President.

LORETTA J. MESTER: I think our response is one of being as transparent as we can about our approach. We’re systematic about it. We’re always the beacon of those dual mandate goals, that’s really our guiding light, and that’s what we’re focused on.

STEVE LIESMAN: The President frames monetary policy as something of an international competition. He points out that German rates are low and they’re fighting to win, in part to -- to keep their currency low and help their exports and economy. Is that a framework you embrace?

LORETTA J. MESTER: No. I look at the U.S. economy and I look at where our goals are, price stability. Where we are relative to our goals, price stability and full employment. And of course, you know, our economy is part of the global economy. And what happens abroad effects our economy. We’ve seen it on the export side. The value of dollar changes depending on relatives, in terms of inflation, growth, right, and interest rates. So, those that go on abroad do affect the U.S. economy. But when we’re setting our monetary policy, we have to be focused on a dual mandate. And that’s was we do when setting policy.

STEVE LIESMAN: Let’s go back to the policy outlook. Federal Reserve Chairman Jay Powell has characterized the last cut as a mid-cycle adjustment. What does that mean to you and do you embrace that framework?

LORETTA J. MESTER: So, I think when we went in, right, to this year, we knew growth was slowing, right, and if growth were slowing – let’s put it this way: scenario -- weak gross scenario. Right? What does that mean? Really lower growth than we’ve seen. Employment slowing. Right? The interest rate and the economy would be moving down. Okay. If the Fed were to do nothing, right, we would basically be tightening policy. So, you want to follow the industry down. So, I think what we’re trying to do is calibrate our monetary policy to where the economy is going. And sometimes holding steady can be viewed as a tightening of policy if interest rates are falling and the economy is falling, you know, getting slower. So, I think that’s the way I interpret that kind of phraseology.

STEVE LIESMAN: But a mid-cycle adjustment as opposed to a -- what was the other alternative? The Chairman talked about an easing cycle. One is sort of a couple, three rate hikes and done. And the other is a long period of time. Is there any particular one that you think you’re leaning towards now?

LORETTA J. MESTER: Well, right now –

STEVE LIESMAN: Actually, you don’t think we should do any?

LORETTA J. MESTER: Right now, my outlook we’re in a good spot but need to be very attuned to the down side risk. And it could be we have to move policy at some point. Right? And so, that’s how I’m looking at it. I’m always looking -- we have to be forward-looking. We always have look to the future, because we are having to move our policy ahead of where the economy’s going. But at the same time, we have to be attune to what the data tells us about where the economy is going. And it’s that calibration going forward.

STEVE LIESMAN: Sure. Give us a quick rundown of the data that you’ll be looking for between now and September. If it’s a weak jobs report, is something that moves you?

LORETTA J. MESTER: So, I certainly am really attuned to whether the consumer is holding up. Right. And so, jobs, what’s happening in that labor market report is going to be very important. What we hear from business contacts, along with their hiring plans, is very important. What we see on the spending side, very important. But I also want to look at: is the housing market falling off? Is it staying where it is? Is it improving, given where interest rates are? And also, the business side. Are firms now beginning to say, ‘I’m so cautious now. I’m going to really hold. I’m not going forward on those business plans that I had. I’m not going to hire the people I planned to. I do see a falling off on my orders.’ So that’s the kind of data I think will really give context to what’s going to happen over the next couple of weeks before we meet.

STEVE LIESMAN: President Mester, thank you so much for joining us.

LORETTA J. MESTER: Thanks. Good to see you.

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