When Loretta Mester and I started our interview, markets were once again going a bit crazy, with stocks in the U.S. and around the world continuing to drop, and U.S. bond yields suddenly jumping, suggesting investors might be getting nervous about holding Treasury debt. As former president of the Federal Bank of St. Louis, she is no stranger to dealing with negative forces like tariff fears hitting the economy and moves in financial markets that could get ugly.
Lorretta acknowledged all the risks and went on to say that there is no need for the Fed to cut rates, at least not yet. After all when President Trump started putting tariffs on countries around the world, the economy still looked to be on solid ground, and inflation was still too high above its two percent target for the majority of Fed officials seemed to be keen on cutting rates.
As for the market volatility, she said as long as markets “keep functioning” as they have been through all of this market turbulence, there is no reason for the Fed to take any special steps to prevent them from falling. And while the Fed is no doubt monitoring all of this closely, talk of any market-driven moves from the Fed are off base.
Suddenly, as were talking about tariffs and the complications that surround them, news broke that President Trump is dropping the reciprocal tariffs for 90 days while keeping the 10% tariffs on countries around the world. Immediately the stock market that had dropped like a stone again, turned around and started flying higher. And we kept going as stocks rocketed higher.
”Yes it’s good news that they’re pausing for 90 days, but what happens in 90 days?” she said. “So the effect of uncertainty on activity, and that negative effect, I don’t think this resolves that. The only thing that this resolves…would be some kind of commitment to not go back to the higher tariffs, and I don’t think that the President’s going to be doing that.”
So dive in and hear, see what she has to say in the first part of the interview. Why she is watching inflation expectations closely as many Fed officials have said they are too, but why she is not as convinced, “they are as well anchored as you want them to be…and it would be very bad to be complacent” about inflation expectations at this point.
This two-part interview happened by accident, or maybe I should say by “Trump Incident.” Let me know how you like it, and if we should do it again.
First Fed Rule: Are markets functioning? 00:01:20.450
So the 1st thing that I'd be thinking about and I think this is true of many fed members is, are the markets functioning, you know. Is there dysfunction in the market? That's like the 1st when there's a lot of volatility and a shock like this. That's the 1st thing I would be making sure of… to make sure that there's enough liquidity there, and that, you know primary dealers are making the trades, and there's enough liquidity and flow through the pipes if you will.
How are the mandates lining up? 00:02:35.840
I'm sure that the Fed is and the New York Fed Markets test is very much monitoring that. And then you'd want to think through. Okay, well, what are the implications for inflation? What are the implications for employment. And what makes this very difficult, of course, is that when you think about the tariff situation, it affects things in both sides of the mandate in sort of opposite directions. So it's not obvious
The Fed has a lot to consider- 00:05:22.270
I think at this point, if the markets are functioning, if they can find the price, you know where trades are happening, as long as that's happening. Then the fed, as the chair said, has some time to evaluate what the implications. tax policy. You know the Doge cutting of spending immigration policy and then deregulation. So I think they're going to want to look at the whole portfolio of those actions, and that, again, is the timing of the matters. But as long as the markets are functioning, I don't think the Fed's initial, you know, reaction will be cut.
Fed will be watching inflation but may not act 00:06:26.910
If they believe that inflation expectations are going to remain stable, they could sort of look through the near term increases in inflation by keeping rates where they are
Room to move and preparation for it 00:06:56.880
The Fed must be prepared to move. If it turns out that the employment readings and the labor market really deteriorates, they're going to have to be prepared to move later on, so that could be the strategy. It really is dependent on what happens with inflation expectations, because they do not want to do anything that creates the same kind of inflation problem that we've lived through after the pandemic.
Balancing the mandate is hard 00:08:33.490
a movement in supply… can become more persistent. Inflation shocks, if the central bank doesn't do what it should do in terms of removing accommodation at the appropriate pace. I think what we got ourselves into a little bit of a we were a little behind, to begin with, and then we had to, you know, move aggressively. What I'm proposing now is a little bit different in the sense of this is more of a strategy as opposed to being behind. It's going to look like, maybe the Fed's behind, because if they wait and then have to cut because things deteriorate. People are going to say, I think. See, the fed is behind again. But this is not being behind. This is a strategy to balance the 2 parts of your mandate.
Recession risks do rise- 00:11:52.020
The sentiment hit, combined with the wealth hit that we're seeing in the in the stock market, can be, you know, a drag, a big drag on the economy. So a lot of firms that do forecasting. And a lot of economists are basically raise their probabilities for recession. And I think that's right. I mean, I'm not calling a recession necessarily, but I think the probability that we'll be in a recession
Uncertainty is valid concern 00:13:57.190
It's not just saying we're talking ourselves into a recession. There is a real impact of uncertainty and a reasonable one. Right? If you don't really know what's coming right, you want to be more cautious, you know, you want to basically say, Well, maybe I won't spend money on a vacation. Maybe I won't spend money to buy something that I don't really need.
Uncertainty can disrupt investment 00:14:58.440
The other problem is that you know these kinds of disruptions. because they affect long term investments will affect the economy for longer as well. It's not just cyclical. There could be structural things going on. Productivity will be lower. Remember, we had this great string of like higher productivity over the last year or 18 months, the actions being taken, can lower productivity and have a much longer lasting impact on the US.
Can’t have your tariff revenue and US jobs too 00:18:59.490
What we got were considerably higher tariffs. We had a policy that hasn't been well articulated in terms of what the policy is actually aiming to do right, because some of the goals are kind of contradictory to one another. You know you can't use the benefits of higher tariff revenues to offset budgets if everything is going to be moving back to the US.
INTERRUPTION
TRUMP TARIFF SHIFT ANNOUNCED
INTERVIEW CONTINUES IN PART 2 AMIDST NEW POST-TRUMP FACTS
LORETTA MESTER
Loretta J. Mester served as president and chief executive officer of the Federal Reserve Bank of Cleveland from June 2014 to June 2024. In that role, she participated in the formulation of U.S. monetary policy and oversees more than 1,000 employees based at the Bank’s Cleveland office and Branch offices in Cincinnati and Pittsburgh who conduct economic research, supervise banking institutions, promote community development, and provide payment services to depository institutions and the U.S. Treasury. Mester represented the Fourth District on the Federal Open Market Committee (FOMC).
Mester began her career at the Federal Reserve Bank of Philadelphia in 1985 as an economist and was executive vice president and director of research at the Federal Reserve Bank of Philadelphia prior to her appointment as president and CEO of the Cleveland Fed on June 1, 2014.
Mester is an adjunct professor of finance at the Wharton School of the University of Pennsylvania. She has also taught in the undergraduate finance and M.B.A. programs at Wharton and in the Ph.D. program in finance at New York University.
Mester is a director of the Greater Cleveland Partnership, a trustee of the Cleveland Clinic, a trustee of the Musical Arts Association (Cleveland Orchestra), a director of the Council for Economic Education, a founding director of the Financial Intermediation Research Society, a member of the senior council of the Central Bank Research Association (CEBRA), and a member of the advisory board of the Financial Intermediation Network of European Studies (FINEST). She is a member of the American Economic Association, the American Finance Association, the Econometric Society, and the Financial Management Association International.
Mester graduated summa cum laude with a bachelor of arts degree in mathematics and economics from Barnard College of Columbia University. She earned M.A. and Ph.D. degrees in economics from Princeton University, where she was a National Science Foundation Fellow.
Her tenure concluded on June 30, 2024, consistent with Federal Reserve mandatory age and length-of-service policies.
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