Richard Clarida, vice chairman of the US Federal Reserve, told CNBC on Wednesday that he believed the central bank should maintain its ultra-loose policies even as the US economy rushes back from its plunge in the pandemic.
In a Closing Bell interview, Clarida said it expects the economy to grow nearly 7% for the full year, the fastest pace since 1984.
He added that the employment picture will continue to improve but will have to improve significantly before the Fed will feel comfortable withdrawing all the help it has received since Covid-19 ended the longest expansion in US history has done.
“We are still far from our goals and want to see actual progress in our new framework and not just forecast progress,” said Clarida.
Last year, when the economy was held back by efforts to fight the virus, the Fed adopted a new strategy that would not raise interest rates in response to a tightening labor market. Instead, the Fed said it would allow inflation to get a little hot as long as the longer-term average is at its 2% target.
This had a significant policy impact as the Fed continued to hold short-term lending rates near zero and buy at least $ 120 billion worth of bonds every month. Clarida and colleagues have suggested that even if inflation warms as expected in the coming months, policy will not change in current conditions.
“If there were unforeseen, sustained upward pressure on prices in the next year and beyond that would bring inflation to levels inconsistent with our mandate, we would use our tools to bring them down,” he said . “We don’t see overheating as a basis. Of course, there are risks in every outlook.”
Treasury Secretary Janet Yellen, who chaired the Fed from 2014-18, suggested Tuesday that slightly higher interest rates could apply to prevent the economy from overheating. Tax officials rarely offer views on interest rates, which is why the comments have caught the eye in the financial markets.
Later in the day, she went back to those comments and said she was not making any predictions or trying to give advice to the Fed. She added that she does not believe inflation will become a problem and believes the Fed can act if it does.
“She said she didn’t predict or give us any political predictions and I’ll take her at her word,” Clarida said.
He added that market prices have little fear of runaway inflation and that there is currently both upside and downside risk to the economy.
As a result, he believes the Fed should maintain its pace in asset purchases even as its balance sheet approaches $ 8 trillion and the economy shows growth rates seldom seen since the Great Depression.
“Remember, the shock was very severe, the hole was very deep,” he said. “Fast growth is actually welcome when you have eight and a half million Americans who are out of jobs like they were 13 months ago.”
Other Fed officials share their views
Clarida’s remarks came on a busy day for Fed spokesmen.
Central bank officials primarily stuck to the script, as reflected in the statement following last week’s meeting and subsequent remarks made by Chairman Jerome Powell at his press conference.
For the most part, you are seeing a rapidly improving economy that will come with short-term inflationary pressures that are unlikely to last. Current policies are likely to remain in place unless conditions change significantly – mainly that the expected rise in inflation will be due to simple comparisons to last year’s anemic levels and some blockages in the supply chain that will eventually improve .
Charles Evans, president of the US Federal Reserve in Chicago, said he expected the policy “will remain accommodative for some time.” He believes that inflation will remain low mainly because expectations, which he sees as the main driving force, also remain subdued.
Likewise, Boston Fed President Eric Rosengren said the current level of politics was appropriate. He cautioned, however, that “policymakers need to be vigilant” when looking for signs of inflation, especially wages and prices, which respond to improving labor market conditions.
Despite the optimistic outlook on inflation, Fed Governor Michelle Bowman believes that gross domestic product may grow faster and unemployment may fall faster than the Fed’s current outlook suggests. However, it assumes that inflation will remain tame and considers current Fed policy to be appropriate.
Cleveland Fed President Loretta Mester also said my forecast carries “upside risks” but added that she will deliberately be patient unless there is clear evidence that inflationary pressures will cause inflation to be driven to cross our desired path.
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