MNI POLICY: Clarida: Inflation Expectations At Low End of Goal

--Speech Skips Outlook On Economy, Interest Rates

By Evan Ryser

     WASHINGTON (MNI) - Federal Reserve Vice Chair Richard Clarida said Friday

that inflation expectations are at the low end of the range consistent with the

Fed's symmetric objective in the long run.

     "As I look at all of this evidence from market signals, surveys, and

econometric models, I judge that inflation expectations reside at the low end of

the range I consider consistent with our price-stability goal of 2 percent

personal consumption expenditure inflation in the long run," Clarida said in

prepared remarks at the U.S. Monetary Policy Forum. 

     Clarida focused his remarks in New York on the dilemma of how a central

bank's reaction function and financial market prices can interact in

economically suboptimal and potentially destabilizing ways, what former Chair

Ben Bernanke referred to as a "hall of mirrors" problem.

     The Fed does look at developments in asset markets, he said, but never in

isolation and always in the context of balancing asset market signals with

complementary signals from surveys and econometric models. 

     "When signals from all three sources line up in the same direction-as, for

example, has been the case with market-, survey-, and model-based estimates of

r*-the effect of those combined signals, at least on my thinking about the

policy path, is more material than when the signals provide conflicting

interpretations."

     The Fed Vice Chair did point to a decline in the real neutral rate of

interest and the natural rate of employment, as indicated in the FOMC's Summary

of Economic Projections, as a reason for a lower benchmark rate. 

     "These revisions to u* and r* indicate that the FOMC has been data

dependent," he said. "[T]hese updated assessments of u* and r* have had an

important influence on the path for the policy rate actually implemented in

recent years."

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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