Fed's Clarida Says Risk Has Tilted Toward Too-Low Inflation

(Bloomberg) -- The Federal Reserve’s No. 2 official made clear in a discussion about inflation Monday that he remains more concerned about falling short of the central bank’s 2 percent objective than running above it.

“In recent decades, the asymmetry has been toward disinflation forces,” Vice Chairman Richard Clarida said in an interview with Bloomberg Television. Asked about the price impacts of globalization, he said that “we are in a world where central banks, including the Fed, are focused on keeping inflation away from disinflation.”

Clarida’s comments came just after he expressed little concern about price pressures exceeding the Fed’s target.

“We have a symmetric objective around 2 percent,” he said. “Two percent is not meant to be a ceiling. We’ve operated below 2 percent, we could operate somewhat above 2 percent, depending on the shocks.”

Clarida’s comments come after he indicated last week that inflation expectations are coming in on the lower end of the range consistent with price stability.

Not Convinced

The vice chairman’s latest remarks may strengthen the impression that Fed policy makers are not yet convinced they have returned inflation, on a sustained basis, to their long-run objective. The remarks could further reduce expectations the Fed will long continue on its current pace of raising interest rates once a quarter.

Those expectations dropped when Fed Chairman Jerome Powell hinted on Nov. 28 that policy makers may be less aggressive about raising rates in 2019 than they were this year. Powell’s remarks reportedly pleased President Donald Trump, who had been critical of Fed rate hikes.

While investors still anticipate an interest-rate rise when the Federal Open Market Committee meets in Washington Dec. 18-19, they now expect just one hike next year, compared to the three projected by Fed officials in September.

Speaking separately on Monday, Fed Governor Randal Quarles said Powell had accurately characterized interest rates as approaching the range of estimates from Fed officials for the so-called neutral rate -- the level at which rates neither spur on nor hold back the economy.

“There is a range of views on the FOMC about policy and those are expressed in that spread of terminal rates,” Quarles told the Council on Foreign Relations in New York. “So Jay had said quite accurately that we are approaching that range, but it is a range and where we will end up in that range will depend on the data that we receive and our assessment of the performance of the economy over the course of the next year.’’

Downward Shift

Quarles said the Fed is following a policy strategy and “will be following this path until there’s a significant reason to change,” adding that “markets seem to be pretty clear about what it is that we’re intending to do.”

Much of the recent downward shift in expectations has been linked to lower forecasts for economic growth, but inflation may contribute as well. Core PCE inflation on a 12-month basis reached at least 1.9 percent for seven straight months through September. The measure dropped back to 1.8 percent in October after the softest month for price data since February.

Research from the San Francisco Fed released in November suggested this year’s rise in prices was driven by fleeting factors. In addition, oil prices have plunged about 30 percent in the past two months.

Clarida’s wariness about inflation echoes his remarks in a speech Nov. 27 when he said it’s important to continue monitoring measures of inflation and inflation expectations. He pointed to the University of Michigan’s survey of consumer inflation expectations, saying the results were “at the lower end of the range consistent with price stability,” while a market-based indicator was “running somewhat less than 2 percent.”

Market Decline

Clarida also cautioned investors against thinking the Fed would act to halt a sharp stock-market decline.

“I don’t really think of it as a useful way to describe what the current Federal Reserve is doing,” he said when asked about the concept of a “Powell Put” in the interview with Tom Keene on Bloomberg TV.

On communications policy, the Fed Board’s No. 2 official said the central bank had no plans to drop the so-called dot plot, which displays Fed officials’ interest-rate projections. The dot-plot is “not going anywhere, but over time they may evolve,” he said.

Before joining the Fed, Clarida was a Columbia University professor and a global strategic adviser at the Pacific Investment Management Co.

©2018 Bloomberg L.P.

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