Fed’s easy policy stance is not riskier, Mester says

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Cleveland Federal President Loretta Mester on Tuesday said the central bank is running an easier monetary policy than it has in the past but that doesn’t mean it is fraught with danger for the U.S. economy.

“I don’t view it as we’re taking it on more risk. I view it as using the strategies that will achieve our goals more effectively in the new economic environment we’re operating in,” Mester said, in an interview on Yahoo Finance.

Last year, the Fed adopted a new framework that generally means that for the same economic conditions, the Fed will run a more accommodative monetary policy.

See: Fed officials react to weak April jobs data

For instance, the central bank has said it will not make monetary policy moves based on forecasts but will wait to see actual outcomes. In addition, the Fed has said it doesn’t plan to raise its policy interest rates from close to zero until the economy has reached full employment and inflation has risen to 2% and is on track to exceed that level for some time.

Analysts say there are benefits from the Fed’s new strategy because it allow the labor market to run hotter and allow marginal workers to find better full-time and better-paying jobs.

But many economists also warn that the Fed policies come with a cost.

For instance, former New York Fed President William Dudley said earlier Tuesday that the Fed’s new framework means the Fed will be late and will have to play catch up.

“I think the thing people don’t really fully appreciate is, when they actually have to catch up, the level of short-term rates will be much higher than the 2% rate that is currently priced in financial markets,” Dudley said on Bloomberg Radio.

“There is going to be a big gap between where they are starting and where they need to be to keep the economy from overheating,” he said.

“I am just highlighting where the risks lie. People in the financial markets just need to be cognizant of those downside risks,” he added.

And in a scathing op-ed in the Wall Street Journal, billionaire investor Stanley Druckenmiller said Fed policy is distorting long-term interest rates
TMUBMUSD10Y,
1.624%
and have also enabled financial-market excess.

Read: Druckenmiller sees ‘raging mania’ in all assets

U.S. stocks were sharply lower Tuesday morning ith the Dow Jones Industrial Average
DJIA,
-1.81%,
S&P 500 index
SPX,
-1.54%
and Nasdaq
COMP,
-1.15%
all down over 1%.



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