On Tuesday, Cleveland Fed president Loretta Mester said that the recent sell-off in the stock market as well as the increased volatility should not pose any threats to the robust forecast of the U.S. economy.
“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.
Mester added that only after a record-setting run that this had occurred, 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.”
She commented that as of now monetary policy should tighten at a pace that is “similar to last year’s,” where three rate hikes were seen. Among policy makers, they are calling for three rate hikes and the markets have factored three in for this year as well.
Mester believes that this could be the year inflation accelerates, but not at such a fast rate that the Fed will have to add more rate increases. But, at more of a steady climb to the central bank’s two percent target inflation target, that has been missed for the past six years.
With Jerome Powell taking over as new Fed chair, the reaction to the recent events in the market as well the effects of the tax overhaul, will be analyzed.
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Mester believes that with the addition of the tax overhaul it should add anywhere from a quarter to a half a percentage point to economic growth over the next few years. This would permit the economy to surpass its 2 percent rate and support continued hiring.
Although, she stated it is uncertain to know the long term effects of the tax overhaul and if companies would use their funds for new investments and new positions.
“Except for firms in the tax consulting business, the majority of our business contacts have told us that while they welcome lower tax rates, they aren’t planning to make significant changes to their capital or hiring plans as a result,” said Mester.