MNI POLICY: Fed's Clarida: Current Policy Stance Appropriate

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Vice Chair Rich Clarida on Thursday

again endorsed holding U.S. interest rates steady while watching inflation

trends and global and financial developments.

     The U.S. economy is in a "very good place" with the unemployment rate near

a 50-year low, inflationary pressures "muted," inflation expectations stable,

and GDP growth "solid and projected to remain so," he said in a speech prepared

for the Economic Club of New York.

     "The Committee judged at our May meeting that the current stance of policy

remains appropriate, and that decision reflects our view that some of the

softness in recent inflation data will prove to be transitory," he said.

     "However, if the incoming data were to show a persistent shortfall in

inflation below our 2% objective or were it to indicate that global economic and

financial developments present a material downside risk to our baseline outlook,

then these are developments that the Committee would take into account in

assessing the appropriate stance for monetary policy."

     The following are other major points from his remarks:

     --Clarida noted the supply side of the economy expanded faster than

expected last year and in the first quarter. Unemployment has declined but so

has the natural rate of unemployment, which he says could be 4% or even below.

"This would imply that, even with today's historically low unemployment rate,

the labor market would not be as tight -- and inflationary pressures would not

be as strong -- as one would expect." Separately, prime-age participation rates

remain somewhat below levels in the 1990s and may still have some more room to

run. Productivity has also picked up.

     --A flatter Phillips curve makes it "all the more important that longer-run

inflation expectations remain anchored" at 2%. Now expectations "sit at the low

end of a range that I consider consistent with our price-stability mandate," he

said.

     - The FOMC will hold the overall balance sheet size steady "for a while"

after Treasuries runoffs end in September while nonreserve liabilities eat into

the pool of bank reserves. When the committee finds that reserves have declined

to the level consistent with the efficient and effective implementation of

monetary policy, it plans to "resume periodic open market operations to

accommodate the normal trend growth in the demand for our liabilities."

     --The Fed's technical adjustments to the IOER rate have helped keep the

effective fed funds rate well within the FOMC's target range.

     --The FOMC will conduct its own assessment of its monetary policy framework

beginning around the middle of the year and share its conclusions in the first

half of 2020. Until then, policymakers intend to stay open minded and refrain

from predicting their ultimate findings.

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

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