New Cleveland Fed CEO Loretta Mester weighs in on monetary policy

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Nov. 26 2019, Updated 1:15 p.m. ET

Loretta Mester assumes the helm at the Cleveland Fed

Dr. Loretta Mester is the new president and chief executive officer of the Federal Reserve Bank of Cleveland. She has taken over the reins from Sandra Pianalto, who retired on May 31, after over 11 years at the helm. Prior to the new position, Mester was executive vice president and director of research at the FRB of Philadelphia, working as chief policy advisor to Dr. Charles Plosser, president and chief executive officer of the FRB of Philadelphia.

Mester is also co-editor of the Journal of Financial Services Research and the International Journal of Central Banking. She is associate editor at various other professional journals. She was awarded a doctorate from Princeton University in 1985.

A member of the FOMC

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As president and CEO of the Cleveland Fed, Mester will participate in the FOMC, formulating monetary policy for the U.S. economy. Since the president of the Cleveland Fed is part of the 12-member FOMC this year, Mester will be voting on policy decisions taken at the Fed’s FOMC meetings right away. Mester is no stranger to FOMC meetings. She has been present at past FOMC meetings in her previous position as head of research at the Philadelphia Fed.

Alongside Mester, former Bank of Israel governor Dr. Stanley Fischer has been appointed to the Board of Governors of the Federal Reserve. As a member of the Board of Governors, he will also be part of the FOMC. To read about the implications of these and other changes to the Board of Governors and the FOMC, please read the Market Realist series How will the new FOMC members impact the Fed’s policy decisions?

Dove or hawk? Markets agog

Markets in particular will be keenly watching for signs that characterize Mester as a “dove” or a “hawk,” market parlance for whether a central bank official focuses more on higher growth or lower inflation.

Mester speaks on inflation at the Cleveland Fed

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Mester spoke about monetary policy and inflation at the Cleveland Fed’s inaugural conference on inflation on May 30. In her speech titled “Inflation and Monetary Policy: Six Research Questions,” Mester focused on the economic importance of price stability and how it impacts the Fed’s employment mandate. In keeping with the topic of the conference, Mester’s speech focused mainly on inflation. However, she did emphasize that inflation and employment were complementary goals and that, while monetary policy was the “chief determinant of inflation over the long-run,” employment was largely determined by factors that weren’t influenced by monetary policy.

We’ll discuss aspects of Mester’s speech and how her views are likely to impact stock (IVV) and bond (AGG) investments.

The importance of inflation expectations for fixed income markets

Inflation expectations are important for fixed income investors, as increases in inflation can increase nominal interest rates on bonds (HYG) and also reduce the real value of principal repayments for the holders of debt securities. Treasury inflation-protected securities (or TIPS) protect the value of debt securities from eroding due to inflation. Issued by the U.S. government, the par value of these securities increases with inflation. ETFs providing exposure to TIPS include the iShares TIP Bond ETF (TIP). Inflation swaps and the spread between the nominal yield on Treasury securities (TLT) and TIPS (TIP) can provide a sense of how markets are pricing inflation.

About the Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of the 12 regional Reserve Banks in the Federal Reserve System, and it serves the Fourth District. The Cleveland Fed’s district comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia. Being a part of the Federal Reserve System, the Cleveland Fed participates in the formulation of national monetary policy. It also supervises banking organizations, provides payment and other services to financial institutions and the U.S. Treasury, and performs many activities that support Federal Reserve operations system-wide. Plus, the bank supports the well-being of communities across the Fourth District through a wide array of research, outreach, and educational activities. As part of her duties at the Cleveland Fed, Loretta Mester will oversee 950 employees in Cleveland, Cincinnati, and Pittsburgh who conduct economic research, supervise financial institutions, and provide payment services to financial institutions and the U.S. government (source: Cleveland Fed).

In the next part of this series, we’ll discuss Mester’s views on why price stability and employment are complementary goals.

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