Clarida Says Economy in Good Place, Fed to Talk Balance Sheet

(Bloomberg) -- The U.S. economy is on solid footing said Federal Reserve Vice Chairman Richard Clarida, supported by Americans spending even as global manufacturing is in a slump.

“The economy is in a good place,” Clarida said at a forum on Thursday hosted by The Wall Street Journal in New York. “The consumer is in good shape, inflation is stable.”

The comments came as a slew of weak reports this week signaled that the U.S. economy is slowing, threatening the longest expansion on record. An index of service sector activity -- a critical indicator because the industries tend to be consumer based and somewhat insulated from global trade conflicts -- stumbled to a three-year low in September. A separate report on factory activity fell to a 10-year low.

When asked if the chance of a recession was higher than normal, Clarida said, "I don’t think recession risks are particularly elevated under appropriate monetary policy."

Clarida spoke without a prepared text and was answering questions from a Wall Street Journal reporter and the audience. He said the U.S. central bank will discuss the appropriate size of its balance sheet at its October meeting following a recent spike in overnight lending rates.

“We indicated in July that at some point after a time that we’d begin to grow our balance sheet again and Chair Powell indicated that is a topic we will be discussed in our October meeting,” Clarida said. “So we’ll have something for you after our October meeting on that.”

Pressed further on the health of the consumer, the Fed vice chairman pointed to “solid” income growth, a low unemployment rate, and a household savings rate of 8.1%.

“Households compared to prior decades have a cushion,” he said.

U.S. central bankers pivoted away from their rate-hike plans in January and have cut borrowing costs twice this year, in an effort to shield the economy from a global slump in manufacturing brought about by trade disputes and a restructuring of some sectors such as autos. Clarida said he was “happy” about the policy turn earlier this year.

Repo Talks

Money market financing costs soared recently in the wake of tax payments and Treasury debt finance operations. The incident sparked concern that bank liquidity is running too tight. The New York Fed has had to conduct a series of overnight and term repo operations to pump money into the financial system temporarily. Clarida indicated that the topic will be on the table when officials meet later this month.

“We also discussed in our June meeting the possibility of at some point putting in a repo facility to help us keep the federal funds rate in the range and we will certainly be discussing and addressing that at future meetings as well,” he said.

Inflation continues to undershoot the central bank’s 2% target. The personal consumption expenditures price index rose 1.4% for the 12-month period ending August, while the core measure rose 1.8%.

The Labor Department will publish the September jobs report Friday, and analysts will be watching to see if private sector payroll growth continues to decelerate.

The rash of bad economic news has prompted traders to price about an 85% probability of a cut when the Federal Open Market Committee next meets October 29-30.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net;Katherine Greifeld in New York at kgreifeld@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Sarah McGregor, Margaret Collins

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