MNI POLICY: Fed's Clarida Emphasizes Lower For Longer Rates

Federal Reserve Vice Chair Richard Clarida suggested Monday that the FOMC chose a one-year inflation memory in its new operating framework, and laid out several cases where policy makers could delay the interest-rate liftoff.

Even after the Fed raises interest rates, it will keep them lower than officials might have otherwise done to provide more support to the economy, Clarida said. The Fed isn't likely to follow any hard rule or calculation about the average rate of inflation over any period, he said.

"The FOMC chose a one-year memory for the inflation threshold that must be met before liftoff is considered," Clarida said in prepared remarks for a Brookings event. Yet, what 'moderately' and 'for some time' in the Fed's forward guidance rolled out in September means will depend on the initial conditions at liftoff, he added.

After the Fed meets thresholds to raise rates, he said, the average inflation rate since August 2020 could determine how slow or fast the Fed moves from there.

The projected duration and magnitude of the deviation from the 2% inflation goal will, at the time of liftoff and every three months thereafter, be communicated in the quarterly Summary of Economic Projections (SEP) for inflation, Clarida said.

WISDOM OF DELAY

The Fed in September pledged to keep interest rates near zero until the economy reaches full employment and inflation is poised to meet and "moderately exceed 2% for some time."

The Fed "wisely" delayed tightening in 2012 when core PCE inflation reached 2% and unemployment was still 8.2%. "I would hope—and, under our September rate guidance, expect—a future Committee would reach the same judgment under similar circumstances," Clarida said Monday.

His preferred pace of liftoff would also be slower if the Fed staff's index of common inflation expectations lagged, he said.

"I myself plan to focus more on indicators of inflation expectations themselves—especially survey-based measures—than I will on the calculation of an average rate of inflation over any particular window of time," he said.

ASSET PURCHASES

While Clarida included purchases of government assets as part of the Fed's toolkit to keep inflation at desired levels, he did not indicate in his remarks whether he believed any changes in those USD120 billion a month purchases warranted changes. Fed officials discussed options in the path of the asset purchases program at the November FOMC meeting.

"Looking ahead, we will continue to monitor developments and assess how our ongoing asset purchases can best support achieving our maximum employment and price-stability objectives," Clarida added.

Last week, Boston Federal Reserve President Eric Rosengren told MNI he would prefer to see the Fed lengthen the average duration of its Treasuries purchases rather than increase total buys in the near-term.

Asked about yield curve control, Clarida said, "I think it is still in the toolkit. Right now it is not something that we're considering."