Fed Vice Chair Clarida Supports Coming Interest Rate Hike and New Data-Driven Strategy

Early this week, Federal Reserve Vice Chairman Richard Clarida cautioned that the central bank should adjust the way they raise or lower interest rates.  The most recent member of the Federal Open Market Committee, the Fed emphasized how important it is that policymakers depend on data when they determine how and when to raise interest rates.

In prepared remarks, Clarida noted that “A monetary policy strategy must find a way to combine incoming data and a model of the economy with a healthy dose of judgment—and humility—to formulate, and then communicate, a path for the policy rate most consistent with our policy objectives.”

A quick analysis of the present interest rate policy, Clarida that the Federal Open Market Committee is now much closer to reaching a “neutral” level—one that is not stimulative or restrictive—that is quite different from the rate-hiking cycle that began in December of 2015. The FOMC, of course, is responsible for establishing the Fed’s monetary policy.

All of this is quite important, of course, because the market has had a bit of a rough ride.  The Standard & Poors 500 Index, for example, has crossed back and forth through a 10 percent correction and that has set quite a big gap between the Fed and the market.  Now, the market does expect a rate hike in December—as is often the case, when the FOMC meeting disbands—the agency only has plans to price in one more move in all of 2019.  Currently, the Fed projects they will require three rate hikes next year.

Although Clarida is confident that the US economy remains strong, he has expressed some concern about inflation levels that are running slightly under the Fed’s standing goal of 2 percent.  He goes on to say that policymakers should be cautious not to make aggressive moves on interest rates as this could harm economic recovery; nor should they make moves that are too cautious, as this could result in overheating.

But the Fed is not only focused on price stability; they also want to achieve full employment.  Fortunately, the current unemployment rate is 3.7 percent, so Fed officials and economists alike are confident that the economy could have surpassed such a feat.

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