Clarida Says Inflation Outlook Leaves Room for Fed to Be Patient

(Bloomberg) -- Federal Reserve Vice Chairman Richard Clarida said the U.S. central bank can be patient with interest-rate adjustments given muted inflation.

“I believe we can be patient and allow the data to flow,” Clarida said Thursday at a meeting of the National Association for Business Economics in Washington. He noted the low levels of unemployment and the pickup in wages. He called inflation expectations stable while also noting they are “at the lower end of a range that I consider to be consistent with our price-stability goal of 2 percent.''

Asked about the possibility that the Fed might cut rates, Clarida replied, “We are in a very good place. Right now, that's not in my or my colleagues' baseline.”

Clarida's comments follow two days of congressional testimony by Fed Chairman Jerome Powell, who delivered a similar message. The economy is “healthy,'' Powell said, and the Fed has room to pause its rate-hiking cycle to assess what he called “crosscurrents and conflicting signals.”

‘No Slam Dunk'

Clarida also said Thursday that, now the Fed has decided on an operating strategy for setting the federal funds rate, officials can “decide on the appropriate timing and pace for concluding our balance-sheet drawdown.'' That suggests the Fed, which has been reducing the size of its asset-holdings, could slow down as it approaches what's seen as the end-point of the process.

The central bank has yet to make a decision on the composition of its balance sheet once it completes its asset run-off, Clarida said. While the Fed has said it wants to primarily hold Treasury securities, it still needs to decide which maturities it will own. “There is no slam dunk” on the ideal mix, he said.

Commerce Department data released while Clarida spoke showed the U.S. economy cooled by less than expected last quarter as business investment picked up, notching a 2.6 percent annualized pace compared with forecasts for a 2.2 percent print.

The U.S. economy is in the 10th year of an expansion that could become the longest-ever within a few months. Economists expect gross domestic product to expand 2.5 percent in 2019 though the quarterly pace will gradually decelerate into 2020, according to estimates tracked by Bloomberg.

December Shift

The extended period of growth has pulled more people into the workforce and lowered the unemployment rate, even while inflation has moved only gradually higher. By most measures, the Fed is around its mandate of maximum employment and stable prices.

Nevertheless, U.S. central bankers in January shifted away from their December intent to hike two more times in 2019, saying last month they will be “patient'' amid rising uncertainty. They also said the approach would give them time to assess the impact of their tightening so far.

“Global policy uncertainty remains elevated. And financial conditions have been volatile, making efforts to extract signal from noise more challenging,'' Clarida said. “Monetary policy at this juncture needs to be especially data dependent.''

To contact the reporters on this story: Rich Miller in Washington at rmiller28@bloomberg.net;Craig Torres in Washington at ctorres3@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Ben Holland

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