Federal Reserve’s New Vice Chairman Cautiously Backs Further Rate Increases

Sustained stock market turmoil would need to be part of the Fed’s policy decision making, Clarida says

Federal Reserve Vice Chairman Richard H. Clarida presents his insights on the economic outlook and monetary policy at the Peterson Institute in Washington, on Oct. 25, 2018. (Jeremey Tripp/Peterson Institute)

WASHINGTON—Federal Reserve Vice Chairman Richard Clarida, in his first public remarks since taking office last month, said some further gradual increases in the federal funds rate would be appropriate.

“I supported the FOMC’s [Federal Open Market Committee] decision last month to raise the target for the federal funds rate to a range of 2 to 2.25 percent,” he said Oct. 25 at the Peterson Institute for International Economics, a Washington-based think tank. “If the data come in as I expect, I believe that some further gradual adjustment in the federal funds rate will be appropriate.”

Clarida defined the current state of policy as “accommodative,” even though the FOMC decided to remove the phrase from its statement following its policy meeting last month.

The term “accommodative” means that interest rates are sufficiently low to spur economic growth and reduce unemployment.

“I believe monetary policy today remains accommodative, and that, with the economy now operating at or close to mandate-consistent levels for inflation and unemployment, the risks that monetary policy must balance are now more symmetric and less skewed to the downside,” he said.

Clarida who started his four-year term as vice chairman on Sept. 17, also said Fed independence is important to achieve its mandates.

‘Biggest Risk to the Economy’

The remarks come as President Donald Trump has recently doubled-down on his Fed criticism. Trump blamed the nation’s central bank for the latest market turmoil, saying the “Fed has gone crazy.”

In an interview earlier this week with The Wall Street Journal, Trump criticized Fed Chairman Jerome Powell, saying that he threatened economic growth and seemed to enjoy hiking rates.

“Every time we do something great, he raises the interest rates,” he said.

President Donald Trump announces Jerome Powell as the new chairman of the U.S. Federal Reserve in the Rose Garden of the White House in Washington on Nov. 2, 2017. (Samira Bouaou/ The Epoch Times)

When asked about what is the biggest risk to the economy, Trump answered: the Fed.

“To me, the Fed is the biggest risk, because I think interest rates are being raised too quickly.”

Fed officials raised their benchmark rate by 25 basis points in September. It was the third increase this year and the eighth since December 2015, when the Fed started inching rates up from effectively zero percent.

The Fed projects one more rate boost in December and three in 2019.

Market Volatility

Increases in the federal funds rate have a ripple effect on the economy and the stock market.

When the rates go up, they tend to create volatility in the stock markets. As more investors dump riskier assets such as stocks, they often turn to Treasury bonds that offer safe and predictable returns.

In addition, investors and economists view lower interest rates as catalysts for growth. Hence, higher rates mean higher cost of borrowing for consumers and corporations, which, in turn, lead to lower profits and a weaker economy. The stock prices take a hit as well.

The recent equity selloff early this week was driven by a series of fears, including a global economic slowdown and further Fed tightening, according to analysts.

Stocks jumped on Oct. 25, recovering from prior days’ rout. The Dow Jones Industrial Average rose 400 points, or 1.6 percent, while the S&P 500 gained 1.9 percent, and the Nasdaq surged 3.0 percent.

In his remarks, Clarida said sustained stock-market turmoil would need to be part of the Fed’s policy decision.

“Changes in financial conditions are something that is relevant for the economic outlook,” and need to be accounted for “if they are sustained,” he said.

Continued volatility in asset prices including stock prices are indicators of financial conditions, he added.

He also said a recent pickup in productivity, a rebound in business investment, a historically high household saving rate, and tax cuts are tailwinds for the economy.

Despite the unemployment rate at a record low and rising wages, he admitted that the inflationary pressures aren’t that strong. There are no alarms going off currently from labor market, Clarida said.

“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.”

He warned, however, that monetary policy operates with a lag, and with inflation presently near the 2 percent goal, it would be important to monitor inflation projections closely, he said.

Clarida won Senate confirmation to be vice chairman of the Federal Reserve on Aug. 28. His confirmation helped fill the ranks on the Fed’s Board of Governors, which was operating with three out of potential seven members. He joined Trump’s other two picks, Powell and Randal Quarles, who currently sit on the board with Lael Brainard, an appointee of former President Barack Obama.