Fed’s Clarida Says Policy is Closer to “Neutral” but Couldn’t Say How Close



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U.S. Federal Reserve Vice Chairman Richard Clarida, the 2 nd in command, was at it again, nearly reiterating his comments from almost two weeks ago that the central bank’s gradual approach to interest-rate hikes is appropriate as U.S. monetary policy approaches a neutral level.

“As the economy has moved to a neighborhood consistent with the Fed’s dual-mandate objectives, risks have become more symmetric and less skewed to the downside than when the current rate cycle began three years ago,” Clarida said at The Clearing House and Bank Policy Institute’s annual conference in New York on Tuesday.

Gradual rate increases allow the Fed to “accumulate more information from the data about the ultimate destination for the policy rate and the unemployment rate at a time when inflation is close to our 2 percent objective,” he said in the text of his remarks.

Clarida also said the Fed is updating its estimates of the “uncertain” neutral policy rate and an employment rate consistent with stable prices “as new data arrive.” Even so, rates are “much closer to the vicinity” of neutral than when the Fed started its rate-hiking cycle in December 2015.

On November 16, Clarida pushed for the need to raise rates when he said getting the benchmark lending rate back to around 3 percent, the Fed’s estimate of the long-run neutral rate, “would make sense.” Currently, the benchmark lending rate is in a range of 2 percent to 2.25 percent.

The comments suggest the Fed may be preparing the markets for a slowdown in the pace of its rate cuts. The central bank may be trying to get the point across that it may take a pause in rate hike but stands ready to raise again down the road.

As of Tuesday’s opening, the futures markets were pricing in about a 76 percent probability of a quarter-point rate hike in December. After that, investors have become skeptical about the median forecast of Fed officials in September for three additional hikes in 2019.

Another takeaway from Clarida’s comments is that near-future economic reports will be critical to the Fed’s pace of rate hikes next year. This means investors should pay more attention to the reports especially the growth reports. This could lead to added volatility in the markets.

Like recent remarks from Fed Chairman Jerome Powell, Clarida said the Federal Open Market Committee is trying to raise rates at a gradual rate because moving them up too quickly might cause a recession, while moving too slowly could cause the economy to overheat.

Clarida also said that interest rate policy now is “more art than science and the goal should be to sustain the expansion.”

He further added, “Monetary policy at this stage of the economic expansion should be aimed at sustaining growth and maximum employment at levels consistent with our inflation objectives.”

This article was originally posted on FX Empire

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