Fed's Mester Says Stocks "Far From" Level That Could Hurt US Economy

Earlier today we noted that a pressing question that has emerged among Wall Street traders following the recent market drop is at what level in the S&P would the "Powell put" be triggered and when could the Fed end its tightening cycle in support of equities  (with Goldman recently calculating that the drop in the S&P from its recent September highs is the equivalent of a little over one Fed rate hike).

Well, if Cleveland Fed President Loretta Mester is speaking for the broader FOMC - and the Fed Chair - don't hold your breath.

In a prepared speech delivered on Thursday evening in New York titled "The Economic Outlook, Monetary Policy, and Normal Policymaking Now and in the Future" she said that while she acknowledged that "longer-term interest rates moved up, and over the past couple of weeks, volatility in equity markets has increased", financial markets are "far from a scenario" in which falling equity prices would "dash confidence and lead to a significant pullback in risk-taking and spending" that could hurt the U.S. economy, and added that "the S&P 500 index remains higher than it was a year ago. Similar to the swings in the market we saw earlier this year, the movements of late do not seem to be signaling that investors are becoming overly pessimistic."

"While the market volatility poses a risk to the forecast and bears monitoring, it has not led me to change my modal medium- run outlook" she said, suggesting that the market has a long way to fall before at least this hawk pays attention.

Despite market gyrations, Mester said that she expects "growth to come in a tad above 3 percent this year and to be in the 2-3/4 to 3 percent range next year, well above my 2 percent estimate of the economy’s trend growth rate."

She also said that "with appropriate adjustments in monetary policy, my outlook is that inflation will remain near 2 percent."

Yet while she said she would characterize financial imbalance risks as "moderate", she observed that "growth in leveraged lending is strong, commercial real estate valuations are lofty, and I believe we are at a point in the business cycle where increased attention to financial stability risk is warranted because the economy continues to grow above trend and financial conditions remain accommodative, even taking into account the recent increase in long-term interest rates."

In other words, far from considering a fading tightening, Mester believes that financial conditions are still rather loose, indicating far more room to hike.

Turning to the other side of the Fed mandate, she said that firms in the Cleveland district are increasingly limited by labor shortages, and expects unemployment to fall slightly below 3.5% by end-2019, in yet another hawkish indication.

Echoing the latest Beige Book, she cited companies reporting "finding even the reduced number of workers needed for automated plants is going to be a problem in the short run." Even so, Mester still does not expect wages to accelerate unless productivity growth rises, suggesting that the Fed believes there is far more slack than the unemployment rate suggests.

Meanwhile, on the pressing issue of trade, she said that while firms have generally not reported changing plans, manufacturers say "tariffs have been quite disruptive to their supply chains."

She also touching on currencies, saying she expects that the stronger dollar as a result of divergence between U.S. and other economies to be "a small drag on U.S. growth."

And while Mester said it would be a “mistake” for Fed policy-making committee to discontinue publishing the Fed's "dot-plot", she clearly is a believer that dots should be higher in the next few years.

In effect, Mester echoed what Fed vice chair Richard Clarida said earlier in a speech at the Peterson Institute, when he said that with the Fed "as near as it has been in a decade" to its goals of full employment and price stability, and monetary policy still bolstering the economy, "I believe some further gradual adjustment in the policy rate range will likely be appropriate," and added that "the risks that monetary policy must balance are now more symmetric and less skewed to the downside", thereby settling the debate whether the Fed will tweak its policy as the equity market sold off.

The answer: for the next several hundreds or so S&P points, is a resounding no.