Cleveland Fed President Discusses Monetary Policy, Tomorrow’s Jobs and the Importance of Data
Data comes from all sorts of places and takes various forms, Cleveland Fed President Loretta J. Mester told a gathering of Maryland Smith students and faculty on Monday.
For the Federal Reserve, monetary policy decisions are informed by key national and international economic data, of course. Maintaining the Fed’s dual mandate of maximum employment and price stability means watching key indicators closely. But those decisions are also informed by interactions with business leaders from throughout the Fed’s 12 districts. Those interactions often serve as an early-warning sign of future economic trends.
“One of the things that we do at the regional Fed is that we go out and talk to businesspeople in our districts,” Mester said. At the Cleveland Fed, that means fanning out across Ohio, and parts of Pennsylvania, Kentucky and West Virginia. It means talking to a lot of people who depend on the manufacturing sector, one of the country’s worst-performing sectors this year.
She said in the past year, many of the people interviewed cited “trade uncertainty” as a factor affecting their view of the economy. Initially, she said, individuals whose businesses were strictly domestic in nature said the uncertainty wasn’t affecting their decisions in terms of spending or investment. “But as time went on, they also had to really start thinking deeper about it,” she said. People from multinational manufacturing companies, meanwhile, have been more circumspect all along, with many reporting that they were “taking a little bit of a cautious view and maybe not moving forward with as many projects as (they) thought we would, as the uncertainty continues.”
These days, Mester said, there is more available data to look at. “This is a good thing,” she said. “And there are more ways of analyzing the data than we’ve had before, which is also a good thing.”
Mester said she tries to make sure the Cleveland Fed explores all parts of its district when it gathers information, keeping tabs on all eight of its business advisory councils. “Because a lot of times you’ll get information from those contacts about what they’re doing in their businesses well before it will actually show up in the data.”
Here are four other takeaways from her fireside chat:
On monetary policy: A ‘good spot’
Monetary policy in the United States is “well calibrated to the U.S. economy,” Mester said, echoing Fed Chairman Jay Powell. She said the Fed, after three quarter-point interest rate cuts this year, is likely now to stand pat awhile. “We are basically on hold,” she said, “in watchful waiting of where the economy is going.”
Mester, who this year is a nonvoting member of the rate-setting Federal Open Markets Committee, said she would have preferred a more hawkish approach, holding for further signs of a slowdown. “This was really a close call and I can’t fault the committee for lowering the rate now. But I think we’re really in a good spot right now to just wait and see where inflation is going and where the labor market is going before we make another change in policy.”
Growth in the first half of the year was clocked at just above 2.5%, she noted, but, citing her own forecast, added that it’s likely to be “a bit cooler in the second half of the year.”
She acknowledged the headwinds facing the U.S. economy – ongoing uncertainty on U.S.-China trade policy and tariffs, slowing economies around the world, uncertainty about Brexit in the U.K. – and said the domestic economy nonetheless has remained resilient. The labor market is robust, income growth has been improving, consumer sentiment has been strong, and household balance sheets “look good and healthy.”
On negative rates: Don’t expect them
Asked about her view of negative interest rates, Mester said the policy tool, which aims to stimulate spending, “is working better than I might have anticipated” in Europe. But she cautioned about letting them fall too far below zero. “There’s a limit to how low they can go before they start to have a negative impact.”
She said she wouldn’t support the use of negative interest rates in the United States. “Our financial markets here are very different than theirs,” she said. She said “the first tools" she would look to would be the ones deployed in the financial crisis – quantitative easing and forward guidance.
In committees: Seeking a diversity of views
The Federal Reserve is in the midst of a year-long review of its framework for setting monetary policy. The review won’t alter the central bank’s dual mandate – that’s set by Congress. But it may alter its strategies and the tools it uses for hitting those goals. It may also alter how it communicates policy, Mester said.
“We’ve been convening groups – groups that are not the typical groups that you think about. It’s not only economists, but we’re also talking to people in our districts, business people, consumers, labor market leaders – trying to find out what they think about our mandate of employment and inflation so they can inform our policies going forward.”
On the future of jobs: Finding opportunity
Artificial intelligence and machine learning are already transforming industries and are poised to supercharge productivity growth. But those improvements will depend heavily on making sure tomorrow’s workers have the skills to perform the jobs those technologies create. “The transition there doesn’t have to be a smooth one,” she said. “And I think that we have to actually train people to use the technology in the right way.”
The factories she visits has already been transformed by automation, she said. “It’s not the kind of dirty manufacturing that’s pictured in the old movies. It’s this high-tech, pristine, very automated environment. They still need people to work the machines, but it’s a different skill set than you would have had 10 years ago, 20 years ago. To make the transition to those types of jobs, it takes education and different kinds of skills.”
“For the country, it’s a great thing. But we have to get there,” she said.
On career advice: Adapting
Asked what skills students should acquire to become more competitive in the modern workplace, she said, “I may surprise you, in my answer to this.”
AI and machine learning skills are very important. “The technical skills are very important I don’t want to underplay those… You have to respect data. You have to know all these things.”
But to understand technology and to be able to manage risks, you must know how to think through ambiguous situations, be able to make decisions, be able to analyze situations even when the data are incomplete. Be adaptable and be good communicators.
“Those are the kinds of skills that are going to be much more necessary going forward. Have a curiosity about the world,” she said. “Know that things are going to change and be able to be nimble enough to change with it.”
Ahead of her address, Mester met with MBAs and undergraduate finance fellows.
“President Mester engaged and shared invaluable insight about the Fed with a broad range of Maryland Smith students, said Professor of Finance Haluk Ünal, who initiated Mester’s visit and moderated the fireside chat. “Her visit illustrates the connectivity and access to D.C. policy apparatus and its leaders, which reinforces our students’ learning experiences.”