Fed’s Clarida rejects rate-cut pressure

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FEDERAL RESERVE Vice-Chairman Richard Clarida pushed back against speculation in financial markets the central bank will cut interest rates to boost softening inflation up to its 2% target.

“I don’t think we’re at that place now,” Clarida said Tuesday in an interview with Bloomberg Television’s Michael McKee in Washington. “We think the policy in place now will get us there.”

His remarks were later backed up by comments from Fed Governor Randal Quarles, who played down concern over weak inflation. Clarida also echoed Fed Chairman Jerome Powell’s take that transitory factors had contributed to the most recent dip in inflation, and declared the US economy and monetary policy were in “a good place.”

“We don’t see a strong case to move rates in either direction,” he said.

Fed officials last week kept their main interest rate steady and showed no inclination to either hike or cut in the coming months as they weigh contradictory signals from the economy. The Fed has also endured sharp criticism from US President Donald Trump, who called for a drastic cut in rates as officials met last week.

Growth perked up late in the first quarter and unemployment dropped to 3.6%, its lowest in almost 50 years, as the labor market stayed hot in March. Yet inflation took another puzzling dip in early 2019, causing traders to predict a drop in rates later this year.

With the S&P 500 Index down by more than 1% on Tuesday amid escalating trade-war concerns, Clarida deflected a question about the latest twist in ongoing negotiations between the US and Chinese governments, which have threatened to break down.

“So far, the trade measures put in place really only had a very modest effect on the economy,” he said.

China’s top trade negotiator Liu He will travel to the US this week for high-stakes talks as prospects dimmed for maintaining a fragile truce after Trump threatened to raise tariffs on Chinese goods starting Friday. The president issued the threat via Twitter on Sunday.

Clarida expressed hope for an agreement, but added,“if that is not the outcome, then we’ll certainly take that into account in future policy.”

During the interview, Clarida repeatedly stressed the Fed was intent on raising inflation back to its objective. “It’s going to be an important priority of policy, to get us to 2% inflation,” he said.

The central bank is in the midst of a yearlong review of monetary policy strategy, tools and communications practices. With inflation running below target for most of the last decade, the exercise has focused largely on whether the Fed should alter the way it pursues that objective. Some officials have proposed adopting a so-called make-up strategy that would deliberately aim for above-target inflation for a period following a persistent under-shoot.

Clarida said he wouldn’t pre-judge the conclusions of the review before it was completed. He noted that while some of the proposals look great in theory, “there are some important implementation challenges that we would have to look at seriously before we would move away from our existing framework, which has served us well.”

Quarles, who also serves as the Fed’s vice chairman for banking supervision, said “from my point of view, 1.8 is 2”% in terms of the Fed’s inflation goal, and it was important to keep that broader point in mind.

“I would not undergo heroic efforts — including rethinking our monetary policy framework, or significant monetary policy stimulus — in order to edge 1.8 up to 2,” he said. “I don’t come with a prior that something is broken, and this process will tell us how to fix it, nor that everything is fine and that nothing will come out of this process.” — Bloomberg