Fed Should Try to Offset Headwinds If They Persist, Clarida Says

(Bloomberg) -- Federal Reserve Vice Chairman Richard Clarida said the central bank should be ready to adjust monetary policy if headwinds to the economy from financial markets or global growth prove persistent, suggesting caution about moving ahead with interest-rate increases.

“Growth prospects in other economies around the world have moderated somewhat in recent months, and overall financial conditions have tightened materially,’’ he said in the text of a speech late Thursday in New York. “If these crosswinds are sustained, appropriate forward-looking monetary policy should seek to offset them to keep the economy as close as possible to our dual-mandate objectives of maximum employment and price stability.’’

The speech reinforces comments by other policy makers this month that the Fed is likely to keep interest rates on hold through at least March following four hikes in 2018. Echoing remarks by Chairman Jerome Powell earlier in the day, Clarida said the Fed can afford to be patient in determining its monetary stance. And he particularly highlighted the performance of inflation and inflation expectations in that regard.

“Notwithstanding strong economic growth and a low unemployment rate, inflation has surprised to the downside recently, and it is not yet clear that inflation has moved back to 2 percent on a sustainable basis,’’ Clarida said. “As I consider what, if any, adjustment to our policy stance is warranted to achieve and sustain our dual-mandate objectives, I will closely monitor the incoming data on inflation expectations as well as actual inflation.”

The Fed’s favorite inflation gauge, the personal consumption expenditures price index, clocked in at a 1.8 percent year-over-year rate in November. That’s down from 2.4 percent in July, though part of that deceleration reflects a plunge in oil prices.

Clarida repeated Powell’s assertion earlier in the day that monetary policy was not on a preset course. He also made clear that applies to the Fed’s approach to its $4.1 trillion balance sheet, which the central bank is currently reducing by a maximum of $50 billion per month.

“If we find that the ongoing program of balance sheet normalization or any other aspect of normalization no longer promotes the achievement of our dual-mandate goals, we will not hesitate to make changes,’’ Clarida said.

Clarida is the latest U.S. central banker to refine the Fed’s monetary message after the hawkish tone of their Dec. 19 statement and forecasts for further rate hikes in 2019 roiled financial markets. The Fed’s communications -- and a Bloomberg News report that President Donald Trump had discussed firing Powell -- helping bring on the worst December for stocks since the Great Depression.

Since the meeting, Fed officials have indicated they’re less inclined to keep raising than their statement and projections for hikes in 2019 had suggested.

To contact the reporters on this story: Rich Miller in Washington at rmiller28@bloomberg.net;Jeanna Smialek in New York at jsmialek1@bloomberg.net

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Alister Bull, Scott Lanman

©2019 Bloomberg L.P.