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New Fed vice chair signals more rate hikes ahead
WASHINGTON, Oct 26, 2018 (BSS/AFP) – The US economy is in good shape to
keep expanding, but more interest rate increases will be needed to maintain
that trajectory without inflation, newly-installed Federal Reserve Vice
Chairman Richard Clarida said Thursday.
In his first public appearance since taking the post, Clarida said that
even after three rate hikes this year, the Fed’s benchmark lending rate
continues to provide stimulus to the economy that will need to be scaled
back.
And he said the Fed will make its decisions without regard to President
Donald Trump’s repeated attacks on the central bank.
The political pressure “will in no way be a consideration as far as I’m
concerned,” Clarida said.
Trump has called the Fed’s policy of gradual interest rate increases
“crazy” and the “biggest threat” ahead of midterm congressional elections on
November 6.
However, Clarida said: “We have a very clear mandate, and the data shows
up every month in terms of inflation and unemployment, and our job is to
sustain what is a very healthy and robust economy.”
The comments were in response to questions from economist Adam Posen, a
former policymaker at the Bank of England, who said Trump’s criticisms are
“pretty unprecedented for the last couple of decades from a US president.”
– ‘Very, very solid’ –
Trump argues the boom he says is generated by his economic policies are in
danger from rising interest rates, but Clarida is unabashedly upbeat about
the outlook.
The “fundamentals of the economy are very, very solid,” with rapid growth
and a strong labor market, he said.
The Fed raised the key rate to 2.25 percent last month, but Clarida said
“even after our September decision, I believe US monetary policy remains
accommodative.”
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“The funds rate is just now — for the first time in a decade — above the
Fed’s inflation objective” of two percent, he said in his prepared speech.
“I believe that some further gradual adjustment in the federal funds rate
will be appropriate.”
This outlook is in line with comments by Powell and the policy setting
committee. Markets widely expect another rate move in December and three or
four next year.
And Clarida said that even with an unemployment rate at 3.7 percent, its
lowest in nearly 50 years, and wages finally starting to move up, there
remains “scope for the job market to strengthen further without generating
inflationary pressures.”
At the same time, unlike the period prior to the 2008 financial crisis
when households financed consumption with debt, the US savings rate is now
double what it was then.
Clarida said that means households today are “well positioned to maintain
or even increase consumption relative to gains in income.”
That will serve as “a tailwind for the economy, not a headwind,” in
conjunction with lower taxes.
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