Stubbornly high inflation may prompt the Federal Reserve to take a more cautious stance on cutting interest rates this year, a former vice chairman of the Federal Reserve said on Friday.
Richard Clarida, who served as a Fed governor until January 2022 and is now a global economic adviser to asset management giant Pimco, said his former colleagues need to be wary of possible obstacles to Sticky price for plans to ease monetary policy this year.
At a meeting earlier this week, the rate-setting Federal Open Market Committee said it could cut interest rates three times this year, assuming intervals of a quarter of a percentage point. Chairman Powell said falling inflation and a strong economy gave policymakers room to cut interest rates.
“This is probably more of a hope than a prediction,” Clarida said in an interview on CNBC’s “Squawk Box.” “I do hope that the Fed really gets into data-dependent mode because if inflation is sticky and stubborn, Then they shouldn’t cut interest rates three times this year, which is a good example.”
Markets are also expecting three rate cuts this year, although pricing has been scaled back after data at the start of the year showed higher-than-expected inflation.
Federal Reserve officials expect rising housing inflation to be declining, paving the way for lowering key borrowing rates from their highest levels in 23 years. Clarida, however, said it was unclear how far the Fed could cut interest rates.
“In a fairly broad range of circumstances, they’re going to make at least one cut this year,” he said.
However, calculations will vary as inflation data provide mixed signals.
The Fed prefers the Commerce Department’s measure of personal consumption expenditures prices, focusing specifically on core readings that exclude food and energy. The overall PCE reading for the 12 months in January was 2.4%, and the core reading was 2.8% – both above the Fed’s 2% target, but moving in the right direction.
However, the overall consumer price index that attracted more attention in February was 3.2%, and the core consumer price index was 3.8%, both well above the central bank’s target.In addition, the Federal Reserve Bank of Atlanta A measure of “sticky” inflation On a 12-month basis it was 4.4%, and on a three-month annualized basis it was even higher at 5%, which is the highest level since April 2023.
“If the Fed were targeting CPI right now, we wouldn’t even be discussing a rate cut,” Clarida said.
He also noted that while Powell said financial conditions were tight on Wednesday, they were actually “much more relaxed than they were in November.” A Chicago Federal Reserve’s measure of financial conditions It is the loosest period since January 2022.
“I think what’s going on here is a delicate balance that (Powell) is trying to navigate,” Clarida said. “When they realize that the Fed is done and (will start) tapering, financial conditions will naturally start to ease. Of course, that will improve the economic outlook and probably make it harder for inflation to get down to 2%.”
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