The Fed: Fed’s Clarida says he wants more interest-rate hikes — but not how many



Bloomberg News/Landov

Fed Vice Chairman Richard Clarida, taking part in a discussion at the Peterson Institute for International Economics last month.

Federal Reserve Vice Chairman Richard Clarida on Tuesday backed continued gradual interest rate hikes but stressed monetary policy is not on a pre-set course.

He said interest rates were closer to neutral than when the Fed started to hike rates in 2015 but said there is no agreement at the Federal Open Market Committee about “how close” to neutral they are.

The Fed No. 2 said that interest-rate policy now is “more art than science and the goal should be to sustain the expansion.”

“Monetary policy at this stage of the economic expansion should be aimed at sustaining growth and maximum employment at levels consistent with our inflation objectives,” Clarida said in a speech to a conference sponsored by The Clearing House in New York.

Given the uncertainties surrounding the outlook, continued gradual rate hikes was the best way forward, he said.

Clarida said the Fed is constantly updating its estimates of the level of unemployment consistent with stable inflation and the “neutral” level of interest rates.

The process of learning about these important variables as new data arrive “supports the case for gradual policy normalization, as it will allow the Fed to accumulate more information from the data about the ultimate destination for the policy rate and the unemployment rate at a time when inflation is close to our 2% objective,” he said.

Clarida said the economic fundamentals are robust, with gross domestic product averaging an annual rate of 3.3% this year and the unemployment rate of 3.7% at the lowest level it has been since 1969.

Inflation has been running close to the Fed’s 2% target and Clarida said his “base case” is for this pattern to continue.

Read: Inflation may soon sink back below 2% target, San Francisco Fed says

Risks to the economy are less skewed to the downside now than a few years ago, he added.

Echoing remarks by Fed Chairman Jerome Powell, Clarida said the Fed is trying to raise rates, but not too quickly, because that might cause a recession, and not too slowly, because it could cause the economy to overheat.

But if incoming data in the months ahead were to reveal that inflation was running higher than projected at present, Clarida said he would favor increasing interest rates by more than he currently expects will be necessary.

Financial markets think the Fed will not have to be aggressive to combat inflation. The yield on 10-year Treasury note

TMUBMUSD10Y, +0.12%

  is well below its 52-week high of 3.23% hit in early November.

Stocks opened broadly lower after President Trump said it was “highly unlikely” he would hold off on raising China tariffs. The Dow Jones Industrial Average

DJIA, -0.77%

 was down almost 200 points in morning trading.

Greg Robb is a senior reporter for MarketWatch in Washington. Follow him on Twitter @grobb2000.

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