MNI: Fed's Clarida Sees Upside Inflation Risks, Taper on Track

Federal Reserve Vice Chair Richard Clarida said Tuesday an "unwelcome surge" in U.S. inflation should ease while creating new upside risks, and signaled policy makers remain on track to taper bond buys later this year despite a weaker-than-expected September jobs report.

"I continue to believe that the underlying rate inflation in the U.S. economy is hovering close to our 2 percent longer-run objective and, thus, that the unwelcome surge in inflation this year, once these relative price adjustments are complete and bottlenecks have unclogged, will in the end prove to be largely transitory," Clarida said in prepared remarks to the Institute for International Finance.

"I believe, as do most of my colleagues, that the risks to inflation are to the upside, and I continue to be attuned and attentive to underlying inflation trends, in particular measures of inflation expectations," Clarida said.

If the Fed does see indicators of inflation expectations "moving up and running persistently above levels consistent with our price stability mandate" the Fed would react accordingly, he said, without specifying what action it might take.

Regarding the prospect of a QE tapering, which most investors expect will start in November, Clarida said it is likely on track. "So long as the recovery remains on track, a gradual tapering of our asset purchases that concludes around the middle of next year may soon be warranted," he said. However, he added the test for raising interest rates was more stringent than that for tapering bond buys, a view sources have told MNI may be difficult to prove to investors.

Overall job market conditions have kept improving but are still being held back by factors related to the pandemic, he said. Last week's employment report for September showed a second month of gains well below the market consensus, while Clarida pointed to the average increase of 550,000 over the last three months.