MNI POLICY: Fed Clarida: Inflation Muted, Can Afford Patience

By Jean Yung

     WASHINGTON (MNI) - Weaker-than-expected inflation means Federal Reserve

officials can afford to be patient while they wait to see whether worries over a

global slowdown and tighter financial conditions persist, Fed Vice Chair Richard

Clarida said Thursday evening, adding that should these crosswinds for the U.S.

economy persist, policy should respond. 

     "Recent developments in the global economy and financial markets represent

crosswinds to the U.S. economy. If these crosswinds are sustained, appropriate

forward-looking monetary policy should respond to keep the economy as close as

possible to our dual-mandate objectives of maximum employment and price

stability," he said in remarks prepared for the Money Marketeers of New York

University in New York, N.Y. 

     "With inflation muted, I believe that the Committee can afford to be

patient as we see how the data evolve in 2019 and as we assess what monetary

policy stance is warranted to sustain strong growth and our dual-mandate

objectives," he said. 

     Despite strong economic growth and a low unemployment rate, inflation has

surprised to the downside recently, Clarida noted. "It is not yet clear that

inflation has moved back to 2 percent on a sustainable basis," he said, and any

policy decisions must consider the inflation half of the Fed's dual mandate. 

     One of the factors that may be keeping a lid on inflation is a pick-up in

productivity growth, Clarida said. "If the positive developments on the supply

side of the economy continue in 2019, they would need to be factored into the

inflation outlook and thus the appropriate settings for monetary policy," he

said. 

--BALANCE SHEET

     The Fed is in the midst of discussions over the ultimate destination for

its balance sheet reduction program, Clarida said, making no decision as yet. 

     The size will depend on both banks demand for reserves as well as the Fed's

longer run policymaking framework. The current abundant-reserve system for

implementing policy "has served us well," he said. On the other hand, the Fed is

still trying to understand institutions' liquidity demands. 

     He also pledged that the Fed would "not hesitate to make changes" to its

balance sheet normalization plan if it "no longer promotes the achievement of

our dual-mandate goals," but did not elaborate further.  

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

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