Cleveland Federal Reserve President Loretta Mester said she voted against this week's interest rate cut because it leaves the central bank with no further rate ammunition and could have been more effective later.
In a statement Tuesday morning, the central bank official explained her lone dissent against the move Sunday to slash the Fed's benchmark rate to near zero, where it was during the financial crisis and for seven years after.
"I preferred to stage our policy actions by first providing liquidity to improve market functioning, supported by a smaller reduction in the funds rate," she said. "This would have preserved the option of a further cut in the funds rate, if needed, for a time when market functioning had improved and such an action could be expected to be most effective in supporting the economy" after the coronavirus scare had been contained.
Mester noted the disruptions in financial markets since the coronavirus scare have intensified. As such, she said she supported all of the other measures of the Federal Open Market Committee, including $700 billion in asset purchases and a reduction in the rate charged at the Fed's discount window for bank borrowing.
Going forward, she said if conditions continue to deteriorate she would support instituting financial crisis-era programs like a commercial paper facility as well as a term auction facility if the discount window isn't enough to keep money flowing for financial institutions.
She said interest rate cuts in the current climate are less impactful.
"When markets are not functioning well, the transmission mechanism of monetary policy to the economy is disrupted, and any reduction in the target federal funds rate will have less of an impact on the real economy," Mester said.