Loretta Mester was surprised if not shocked - with the rest of the world - when President Trump announced a 90-day pause in forcing the huge reciprocal tariffs he put on countries around the world. An announcement that had fueled a stock market meltdown and reinforced forecasts of a U.S. and possibly global recession. But it did not convince her that the worst is over.
We both were stunned as this came right in the middle of the interview we were doing where she said recent market volatility was not at a point where it would force the Fed to take steps to cut rates now. Especially when inflation is still high relative to the Fed’s two percent target and tariffs may yet push prices higher.
Following the announcement, after we took a couple of minutes to pause and see exactly what was happening. ”We’ll see if that 90 days is enough to rethink this policy and come up with something that’s a little more coherent, and will be less devastating,” she says as we continued our conversation that was interrupted when this unexpected but certainly hoped for tariffs announcement was made.
We went on to dig deeper into the question of what all of this means for the Fed. “This is another one of these big shocks to the system and it’s a very difficult one for the Fed because it’s going to affect its dual mandate in different directions.”
So do what Loretta and I did. Dive in to the second part of our interview and hear, see more of what she has to say. And then let me know what you think of my unexpected step into a two-part interview.
00:26:14.430
Kathleen Hays: see here, reciprocal tariffs, stocks, jumped 1,500 points. I know you're watching your screen, too, and are up about 7% on the day. Of course. How it's been lately tariff turbulence we don't know where they're going to go next. What's your reaction?
00:26:30.110
Loretta J Mester: Well, I'm not surprised that the market reacted in a positive way, because, you know, they've been looking for any kind of positive news, and we've seen over the last couple of days positive news. It would go up and then negative news. It would go down. So they're really trading on these reports. I mean, it'll be interesting. We'll see if that 90 days is enough time to rethink this policy…
A calming move…but no panacea 00:27:14.790
But no doubt this is a calming move on the part of the administration to try to calm things down. And then we're going to have to see. I think the uncertainty remains, because I think you know. Yes, it's a good news that they're pausing for 90 days. But what happens in 90 days? So the effect of uncertainty on activity and that negative effect. I don't think this resolves that the only thing that would resolve this would be some kind of commitment to not go back to the higher tariffs, and I don't think the President's going to be doing that. At least everything I've read suggests that he won't be doing that.
Still no cause for rate cuts 00:29:26.210
Well, I wasn't thinking that they would need to cut before the tariffs right, because we saw inflation moving up, and we saw some indication that some of the longer run medium run measures of inflation. Expectations were not as stable as we'd like. So you know what's on the table is a potential for much weaker growth and employment in particular, since that's the mandate on the part of the fed. So that did change sort of what you thought about what the Fed would do. But I would be cautious about, you know, cutting rates at this point, because we know that in the short run. We're going to see if the tariffs do come back. We're going to see higher inflation measures
The Fed can lock into the right scenario 00:30:25.990
…you know what are the implications of that scenario. So, I submit they were in a good place with their policy stance, I think, taking the time to evaluate. You know where the economy is going is the right thing to be doing. So, I suspect that's what they're doing internally now, right is they're looking through various scenarios, or having the staff run their models through various scenarios, so that they're prepared right? So they know that if the economy, you know, moves in one direction this would be the right policy if it moves in another direction. This is perhaps another policy that they want to consider, so that they're prepared.
Fed will be watching the job market closely-00:31:02.400
So they're going to be looking very closely at what they're hearing from business people and labor market representatives. So they understand what's happening in those critical areas before it shows up in the data. Necessarily. And I think that's the mode they're going to be in is really looking at soft data, not necessarily moving on the soft data, but using it to give them an indication of where the economy is more likely to be going, so that then they're prepared to move.
...and watch closely inflation expectations 00:31:29.330
But they have to be very serious about the inflation part of their mandate at this point. Given the high inflation we've lived through and given that inflation expectations. I mean, I think some of the readings we've gotten suggest that they're not as well anchored. and I'm talking about the medium long run inflation, as we would hope. the move up that Michigan showed in the 5 year 5 year forward. Nonetheless, right, there's enough evidence with some of the survey measures that they are moving in a direction that suggests that perhaps right, they're not as well anchored as you want them to be, so I don't think I think it would be very bad to be complacent.
Tariffs could stoke inflation fears; rise expectations 00:34:07.720
The amount of price increase since the the increases started in April 2021, people are not <happy>. People are correct to be, you know, not happy with the level of prices. So I would think that that would mean when they start to see some of those higher prices on goods that are tariffed - if the tariffs end up going through - that that will affect their expectations for inflation going forward. And that's something the Fed needs to take very seriously.
Big shock dual risks big problem 00:35:38.520
This is another one of these big shocks to the system, and it's a very difficult one for the fed because it's going to affect its dual mandate goals in opposite directions. And so this is a balance they really are going to have to take, you know. Careful. Look at how to balance those risks…
May is too soon for a rate cut 00:36:35.220
It's hard to imagine in May that you'd want to cut rates, because there just hasn't been enough time for some of the price increases that even though some firms are saying they're putting them in. And we haven't really seen a turn in the hard data yet.
FOMC strength is its diversity 00:38:52.720
That's a strength of that committee, and the strength of the fomc is that it allows for that kind of discussion, and then they work towards some consensus about what the path to take is at that meeting. And then thinking through, Okay, what do we need to see next? What do we have to see next? To determine what we want to do with rates. So I think that's actually good. I'd be worried in this kind of time period if we didn't see differences of opinion on that committee.
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 represents 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.
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