(Bloomberg Opinion) -- Every once in a while, markets get a really good speech from a Federal Reserve official that summarizes in one place the what, why and so what of U.S. monetary policy. This was the case on Thursday morning when Richard Clarida, the Fed’s vice chairman (and, for full disclosure, a former colleague of mine at Pimco) spoke to the Council on Foreign Relations. Here are the five main takeaways for markets from this speech:
- Helped by the Fed’s “well-timed” 2019 interest rate cuts, the U.S. economy remains in a “good place” as indicated by a solid labor market, GDP growth, and low and stable inflation.
- The constructive economic outlook is expected to continue, especially as what were “significant global headwinds and global disinflationary pressures … may be beginning to abate.”
- There is no sign of a pickup in inflation as actual secular and structural disinflationary forces continue to offset possible cyclical inflationary pressures.
- Together, all this means that while monetary policy “is not on a preset course,” there’s no need for the Fed to take back the 2019 cuts that were characterized as an insurance move.
- The continued low-for-long policy paradigm does not mean that Fed policy has nothing to think about. In addition to the continuing review of “the strategy, tools, and communication practices,” the Fed will also be looking to adjust its (repo-related) balance sheet management, including a gradual “transition away from active repo operations this year.”
All this will be music to the ears of traders and investors who have profitably ridden a liquidity-driven rally that has allowed them to quickly overcome a set of shocks, including the latest one, the sudden escalation of the U.S.-Iran conflict. Specifically, a senior influential Fed official is reassuring them not to worry that the stock market will be derailed by a sudden change in monetary policy, a misbehaving bond market or both. What it doesn’t guarantee, however, is a smooth transition from the constructive short-term outlook to the unusually uncertain medium term.
To be successful, this transition requires the type of comprehensive policy response that I have discussed in previous columns. And it is one that central banks, while undoubtedly willing, are unable to deliver on their own.
To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge, senior adviser at Gramercy and professor of practice at Wharton. His books include "The Only Game in Town" and "When Markets Collide."
©2020 Bloomberg L.P.