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Fed's Mester: Trade war 'definitely a headwind' for the US economy

Javier E. David
Editor focused on markets and the economy

Cleveland Federal Reserve President Loretta Mester said on Friday that the trade dispute between the U.S. and China was a negative for the economy, even as consumer spending and unemployment continue to show signs of resilience.

Mester’s remarks, made at a conference in Jackson Hole, came on the heels of China’s announcement that it would impose two new rounds of tariffs on U.S. goods worth $75 billion.

“There’s no doubt that trade uncertainty and tariff battles...has really been a cloud on the outlook,” Mester told Yahoo Finance in an interview.

Citing constituent concerns about the bilateral trade war, she said “the uncertainty about what’s next in trade policy is something they point out. So it's definitely a headwind and a downside to the economy.”

In a lengthy tirade against both China and the Fed, President Donald Trump said he was planning a response to Beijing’s new salvo.

Mester is not a voter this year on the Fed’s policy deliberating Open Markets Committee (FOMC), which sets interest rate policy. Amid a debate over the health of the economy — and what the Fed should do to avert a recession — Mester has voiced skepticism about whether the economy needs rate cuts.

Growth has slowed sharply, leading to elevated fears of a global recession in 2020. Yet Mester pointed out that “you have a consumer side that’s actually held up very well and strong labor markets and wages going up.”

Cleveland Federal Reserve Bank President Loretta Mester speaks in London, Britain, July 2, 2019. REUTERS/Marc Jones

She added: “The overall economy is still performing around trend and that’s kind of what we expected for the this is all about assessing the risk and making sure our policy is calibrated to the economy going forward.”

"I could see scenarios where we hold rates steady. I could see scenarios where we move the rate down. I think we just have to take the time to really evaluate" the state of the economy, Mester told Reuters just last week.

Defends Fed’s independence

Last month, the central bank lowered interest rates for the first time since the 2008 financial crisis, in a move widely considered to be an “insurance cut” against recession.

Yet the move hasn’t quelled fears the economy could hit rougher shoals later this year — nor has it kept Trump from publicly berating the Fed for what he perceives as its intransigence.

Given the relative health of labor markets and consumer spending, some market watchers have questioned whether the rate cut showed a Fed that’s too beholden to temperamental market investors — or to mounting political pressures from the White House.

As markets were whipsawed on Friday, and the president lashed out at the Fed in tweets, Mester told Yahoo Finance that the central bank’s decision making was “independent from short run political considerations.” The Fed’s independence leads to “better economic outcomes” for the country, she said.

“We aren't independent in the sense of not being held accountable. We are accountable. We're accountable to the Congress and to the American people,” Mester said.

“And it is a complicated environment we're in terms of the global economy and our linkages. But we're always focused and driven by making policy in order to achieve those goals. And we hold ourselves accountable for our actions,” she added.

-Jillian Harding and Daryen Ru contributed to this report

Javier David is an editor for Yahoo Finance. Follow Javier on Twitter: @TeflonGeek

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