Fed Vice Chairman Richard Clarida said on Thursday the central bank’s current monetary policy stance was appropriate and remained accommodative, but indicated that the Fed was flexible if the outlook to the economy materially changed.
Clarida said the economy was in a “good place” and “there was no reason that this expansion cannot continue,” delivering his remarks at the Council of Foreign Relations in New York.
He highlighted the strength of the consumer, nothing that the savings rate was around a 20-year high and that U.S. households were less indebted than before. Since the 2008 financial crisis, the banking system was also much better-capitalized, he argued.
Clarida did see inflation rising to 2%, but the risk was to the downside. He conceded that the puzzle was why inflation has persistently stayed below the central bank’s target for the past decade.
He said disinflationary pressures from the global economic slowdown last year had played a key role in prompting the central bank to adjust monetary policy last year, lowering interest rates three times.
“The risk globally is all economies going down together,” he said.
He said the neutral interest rates across the world were lower in part because of the growing demand for safe and risk-free assets. The neutral rate is the point at which monetary policy is considered neither accommodative or restrictive for economic conditions.
Clarida acknowledged the Fed’s review of its policy tools, begun in February 2019, did cover average inflation targeting, and was something the central bank was taking into consideration. Such a policy could allow inflation to temporarily overshoot the central bank’s target to make up for periods of prices falling short.
He said the review would not make recommendations on fiscal policy, but Clarida agreed monetary policy and fiscal policy should work in lockstep to combat an economic downturn.
Clarida emphasized the central bank’s repo operations and Treasury bill purchases were aimed at keeping the federal funds rate within its target range, and were less focused on the running of repo markets.
In his speech, Clarida said the pace and size of the Fed’s repurchasing operations would shrink over time, but he could foresee some operations continuing at least through April when tax payments will lower level of reserves in the banking system. As part of these operations, the central bank will temporarily lend funds to broker-dealers in return for high-quality collateral like Treasurys.
See: Fed criticized for ‘blindly’ sticking to inflation target
Read: Experts doubt Fed has all the tools it needs to fight recession
In markets, the 10-year Treasury note yield TMUBMUSD10Y, +0.87% was down around a single basis point to 1.862%. The S&P 500 SPX, +0.49% and Dow Jones Industrial Average DJIA, +0.56% was on pace to open higher on Thursday.
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