MNI POLICY: Fed's Clarida: Inflation Trend Key for Policy Path

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve should continue with gradual

interest rate increases, but if inflation remains stable amid strong employment

and GDP growth, there would be no need for the Fed to respond more aggressively,

Governor Richard Clarida said Thursday. 

     In his first public remarks since being appointed to the Fed Board by

President Donald Trump, Clarida said he supported the latest rate hike and saw

room for "some further gradual adjustment in the policy rate." 

     But even as he reinforced expectations for gradual rate increases into next

year, Clarida sounded an optimistic note on the economy's longer-run capacity,

noting that productivity growth had accelerated somewhat over the past few years

along with business investment. A pick-up in trend productivity growth "deserves

close monitoring," he said, and could mean the economy could run hotter without

stoking inflationary pressures. 

     "If strong growth and robust employment gains were to continue into 2019

and be accompanied by a material rise in actual and expected inflation, that

circumstance would indicate to me that additional policy normalization might

well be required beyond what I currently expect," Clarida told the Peterson

Institute in Washington. 

     "By contrast, if strong growth and employment gains were to continue and be

accompanied by stable inflation, inflation expectations, and expectations for

Fed policy, that situation, to me, would argue against raising short-term

interest rates by more than I currently expect." 

     Clarida laid out other arguments for why labor market strength might not

translate to higher inflation. 

     He said he is also starting to see a sustained rise in real wages at or

above the pace of productivity growth, and historically speaking, these types of

wage gains "were not accompanied by a material rise in price inflation." 

     Over the past few years, economists have revised lower their estimate of

the natural rate of unemployment, which means that "even with today's very low

unemployment rate, the labor market might not be as tight -- and inflationary

pressures not as strong -- as I once would have thought." 

     At the same time, a rise in the still-low rate of labor force participation

among prime-age workers "provides scope for the job market to strengthen further

without generating inflationary pressures." 

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

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