File photo: Federal Reserve Vice Chairman Richard Clarida poses before boarding a bus to tour South Dallas as part of a community outreach by U.S. central bankers, in Dallas, Texas, U.S., February 25, 2019. REUTERS/Ann Saphir
May 30, 2019
By Trevor Hunnicutt
NEW YORK – A top Federal Reserve official seemed in no rush to change the central bank’s posture on monetary policy, seeing the U.S. economy in “a very good place” and as close to policymakers’ goals as it has been in decades.
“The U.S. economy is in a very good place, with the unemployment rate near a 50-year low, inflationary pressures muted, expected inflation stable, and GDP growth solid and projected to remain so,” Fed Board of Governors Vice Chair Richard Clarida told an economics group in New York.
Meanwhile, multiple signs point to interest rates being in the right place and an economy as close to the Fed’s goals of maximum employment and stable prices as it has been in 20 years, he said.
The Fed has kept rates on hold this year within a 2.25-2.50% range as markets have increasingly bet that their next move may have to be a cut given tepid inflation pressures and risks from a U.S.-China trade skirmish.
Still, policymakers stand ready to adjust policy if there are signs of a persistent shortfall in inflation or if other developments show risks to the economy, according to Clarida.
“However, if the incoming data were to show a persistent shortfall in inflation below our 2 percent objective or were it to indicate that global economic and financial developments present a material downside risk to our baseline outlook, then these are developments that the Committee would take into account in assessing the appropriate stance for monetary policy.”
Clarida said the Fed’s policies need to sustain the strong economic trends as long as possible, and that the Fed’s decision to keep rates on hold is based in part on a belief that some of the softness in price increases will prove to be “transitory.” Still, he said people’s expectations of future inflation are at the “low end” of a range consistent with the Fed’s goals.
The Fed has a 2% target for inflation, which it sees as enough to encourage growth without eroding the value of a dollar too much.
Inflation was much weaker than initially thought in the first quarter amid a sharp slowdown in domestic demand, which could cast doubts on the Fed’s view that the benign price pressures were largely because of temporary factors.
The personal consumption expenditures (PCE) price index excluding the volatile food and energy components increased at a 1.0% rate last quarter, the government said. The so-called core PCE price index, which is the Fed’s preferred inflation measure, was previously reported to have risen at 1.3% pace.
Clarida pointed a benign picture of the risks though, saying that fiscal policy would continue to support growth, despite many economists reporting that the benefits to growth of a large U.S. tax cut in late 2017 are waning. He said rising employment and wages are not showing up in higher price pressures and also may suggest that potential growth is higher than current estimates.
(Reporting by Trevor Hunnicutt; Editing by Chizu Nomiyama)
