Fed Officials See Resilient U.S. Economy

Federal Reserve officials downplayed concerns about the impact of geopolitical uncertainty on the U.S. economy amid flaring tensions with Iran, even as a record of the central bank’s meeting last month showed that downside risks remain on their minds.

“That’s one of the great things about the U.S. economy, is it does have this resiliency to it,” Cleveland Fed President Loretta Mester said Friday in an interview on Bloomberg Television. “Obviously we can’t know what is going to happen in the Middle East at this point, and it adds to the uncertainty surrounding things, but fundamentally, the economy is sound.”

Mester’s comments, coming from the sidelines of the annual American Economic Association meeting in San Diego, echoed those of her Chicago Fed counterpart Charles Evans, who spoke earlier in a Bloomberg TV interview.

Stocks fell Friday following news that the United States had killed a top Iranian general in an airstrike in Baghdad, escalating tensions in the Middle East and sending oil prices soaring. In the U.S., a widely followed gauge of business activity in the manufacturing sector published Friday unexpectedly dropped to the lowest level since 2009, signaling a worsening contraction.

“We’ve found that the economy can continue to grow even when manufacturing is contracting just a little bit, so I’m hopeful that we’ve got a really resilient economy at the moment,” Evans said.

The U.S. unemployment rate ticked down to 3.5 percent in November, matching a half-century low, and has spent most of the last two years below 4 percent. Yet inflation remains under the Fed’s 2 percent target, as it’s been throughout most of the last decade, a development that’s confounded policymakers, who expected a tighter job market to put more upward pressure on consumer prices.

Evans reiterated his call for keeping interest rates low for long enough to drive inflation above the Fed’s target. “I think at this point in the cycle we really need to get inflation up to 2 percent, and above 2 percent somewhat,” he said.

Robert Kaplan, president of the Dallas Fed, said he’s not looking to adjust his forecast for economic growth in the United States in 2020 based either on disappointing manufacturing numbers for December or the rising tensions between the U.S. and Iran.

Speaking in an interview in San Diego, Kaplan said the manufacturing data were “consistent with my outlook” for slowing global growth and sluggish business investment. Despite that, he still expects strong U.S. consumer spending to drive 2 percent to 2.25 percent growth this year.

While conceding that geopolitical tensions could hurt some financial markets, he took a measured view of the risks. “A repricing of risk assets could be healthy,” Kaplan said. “What I would watch for is a severe tightening in financial conditions, particularly the availability and cost of money.” Kaplan also said he thought the Fed should hold rates steady through 2020. “That’s subject to change, but I don’t see any reason to change that yet,” he said.

Minutes of the Fed’s December 10-11 meeting, released Friday, showed that officials view monetary policy as likely to remain appropriate “for a time” amid what they see as persistent downside risks.

Geopolitical threats are on that list, though the headwinds from trade tensions and a potential no-deal Brexit are judged to have receded, while policymakers remain concerned about inflation running below their 2 percent target.

Officials left rates unchanged at the meeting, following three cuts in 2019, and signaled that policy will stay on hold through 2020, keeping the central bank on the sidelines during a U.S. presidential election year.

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