The Fed: Fed’s Mester: Economy will ‘work through this episode of market turbulence’

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Senior economics reporter

Cleveland Fed President Loretta Mester expects the Fed to reach its goal of 2% inflation over the next one to two years.

The sharp moves in the stock market seen over the past 10 days remain “far away” from being large enough to spill over and damage the economy, said Cleveland Fed President Loretta Mester, on Tuesday.

“I expect the economy will work through this episode of market SPX, +1.39% DJIA, +1.70%  turbulence and I have not changed my outlook,” Mester said in a speech to the Chamber of Commerce in Dayton, Ohio.

Mester, who is a voting member of the Fed’s interest-rate committee this year, said she wanted the central bank to maintain its gradual pace of rate hikes this year and next “at a pace similar” to the three quarter-percentage-point moves in 2017.

“I believe this gradual upward path of interest rates will help balance the risks and prolong the expansion,” Mester said. It would guard against the risk that the economy might overheat and helps avoid a buildup of risks to financial stability, she added. Mester is considered one of the more hawkish Fed presidents.

“Of course, this is my current view of monetary policy,” Mester said. “If upside risks to growth come to pass, we may need to steepen the path a bit: if inflation surprises to the downside, we may need to go a bit slower,” she added.

Read: ‘Risks of a recession’ are rising, says head of world’s largest hedge fund

The Cleveland Fed President said a larger positive effect from the Trump tax cuts is one upside risk.

At the moment, Mester said she expects the tax package will add about a quarter to one-half percentage point to annual growth over the next couple of years.

Read: Latest budget could make interest rates ‘spike,’ says White House’s Mulvaney

“I expect to have a better read on how households and firms are actually responding to the tax changes over the next several months,” she said.

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