Clarida Opens Door to Fed Rate Cut If the Economic Outlook Dims

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The Federal Reserve is prepared to ease monetary policy if it sees mounting risks to the U.S. expansion, Vice Chairman Richard Clarida said while stressing the economy is in a “very good place” with unemployment low and inflation muted.

“Let me be very clear, that we’re attuned to potential risks to the outlook,” he said Thursday after a speech to the Economics Club of New York. “If we saw a downside risk to the outlook, then that would be a factor that could call for a more accommodative policy. So that’s definitely something in the risk-management area that we would think about.”

Investors betting on U.S. economic weakness have driven the yield on 10-year Treasury notes down to 2.25%, from 2.5% on May 1, as the U.S-China trade war escalated. That’s deepened the inversion of the yield curve, which has heralded oncoming recessions in the past. Interest-rate futures fully price a Fed cut by the end of the year.

U.S. central bankers next meet June 18-19. Clarida, like Chairman Jerome Powell, described a recent dip in inflation as “transitory.”

Clarida said that mounting risks, not just disappointing incoming economic data, could be a trigger for the Fed to cut rates if it felt the need to act preemptively, with inflation already below the central bank’s 2 percent target. The Fed’s preferred price index, minus food and energy, rose 1.6% for the 12 months through March, and analysts expect the same number from the April report due Friday.

That said, his comments, which emphasized a “very constructive” baseline outlook with solid growth and a strong labor market, made no direct reference to the trade dispute.

“He didn’t go as far as to say that the pickup in downside risks now because of the trade-war intensification is enough for them to cut rates,” said Priya Misra, head of global rates strategy at TD Securities.

In his speech, Clarida cautioned that if data showed a “persistent shortfall” under the Fed’s 2% target, or signaled that “global economic and financial developments present a material downside risk to our baseline outlook,” the Federal Open Market Committee would take that into account as it weighed monetary policy.

Responding to questions from a moderator afterward, Clarida said he paid attention to the yield curve, which he said had witnessed some “brief” inversions, while also pinning the recent flattening on global financial developments.

Michael Gapen, chief U.S. economist at Barclays Plc in New York, said investors are flocking to Treasuries and other high-quality assets due to a breakdown in U.S.-China talks, which points to a longer trade war that will weigh on global growth prospects. The JPMorgan Global Manufacturing PMI stood at 50.3 last month, the lowest reading in three years.

Clarida said the U.S. central bank is closer to achieving its dual mandate of maximum employment and stable prices than any period in the past 20 years. The Fed’s mission now is also focused on sustaining those conditions, he said. That said, he noted that “indicators suggest that longer-term inflation expectations sit at the low end of a range that I consider consistent with our price-stability mandate.”

The Fed No. 2, who was appointed to the board by President Donald Trump, said fiscal policy played “an important role” in boosting growth last year and will continue to be supportive in 2019. He said the supply side of the economy, which he defined as employment, labor-force participation and productivity, “expanded faster than most forecasters outside and inside the Fed expected.”

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net;Matthew Boesler in New York at mboesler1@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Scott Lanman

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