FX.co ★ Mester: Returning to pre-crisis levels is quite impossible

Cleveland Fed president Loretta Mester claims that returning to pre-crisis levels is quite impossible, even amid the current economic recovery.

"We are really in a deep hole," Mester said during an interview. "Although the economy has begun to grow and we have already received positive results, it is not yet possible to return to the state that was in February," she added.

Instead, Mester said that she expects US GDP to be about 6% lower by the end of 2020, with the unemployment rate remaining high.

In addition, higher target inflation, as what the Federal Reserve proposed on Thursday, could ultimately slow the growth of the economy, not stimulate it.

"Interventions to stimulate the economy by raising inflation expectations and lowering real interest rates could backfire, if unintended returns exceed and replace desired ones," commented Professor Yuriy Gorodnichenko of University of California.

Surveys also show that many businesses and households often interpret higher inflation as a harbinger of slower growth.

It revealed that families and firms, in anticipation of higher inflation, are not eager to spend their money out of fear of devaluation, and instead are saving their money to survive an even worse economic situation.

To avoid cuts in spending and investment, precisely when central banks want the opposite, the Fed should reach out directly to the public, perhaps via social media, and take care to communicate their overall goals for the economy to the masses, rather than focus on inflation.

"Simplicity and transparency are necessary to overcome the veil of inattention," economists advise.