The recent stock market sell-off and jump in volatility will not damage the economy’s overall strong prospects, Cleveland Federal Reserve president Loretta Mester said on Tuesday in warning against any overreaction to the turbulence in financial markets.
“While a deeper and more persistent drop in equity markets could dash confidence and lead to a pullback in risk-taking and spending, the movements we have seen are far away from this scenario,” Mester said of a market rout that cut more than 10 percent from major stock indexes.
That occurred, Mester said, only after a record-setting run, and “for now, I expect the economy will work through this episode of market turbulence and I have not changed my outlook. In my view, the underlying fundamentals supporting the economy are very sound.”
Her remarks to the Dayton Area Chamber of Commerce are an important signal from one of the Fed policymakers who has voiced stronger concerns about financial market stability and the prospects that the central bank may risk a run-up in inflation by not raising rates quickly enough.
She said that as of now policy should tighten at a pace “similar to last year’s,” when the Fed raised rates three times. The median outlook among policymakers is currently for three rate increases this year as well.