Former Federal Reserve Vice Chair Richard Clarida warned on Friday that persistently high inflation could prompt the central bank to take a more cautious approach to interest rate cuts this year.
Clarida, who left the Fed in January 2022 and now serves as a global economic advisor at Pimco, emphasized the need for his former colleagues to remain vigilant against stubbornly high prices, which could complicate efforts to ease monetary policy.
While the Federal Open Market Committee (FOMC) signaled its intention to reduce rates three times this year during its recent meeting, Clarida expressed skepticism about the feasibility of this plan in light of ongoing inflationary pressures.
“This may be more of a hope than a forecast,” Clarida remarked during an interview.” “I do hope that the Fed really moves into data-dependent mode because there can be a very good case if inflation is sticky and stubborn that they shouldn’t deliver three cuts this year.”
Market expectations also reflect anticipation of three rate cuts in 2024, although these projections have been tempered following higher-than-expected inflation data at the start of the year.
The Fed is counting on a moderation in shelter inflation to justify lowering its key borrowing rate from its highest level in over two decades. However, Clarida cautioned that the extent of potential rate cuts remains uncertain.
“Under a pretty broad range of scenarios, they’re going to get at least one cut this year,” he observed.
However, the outlook becomes less clear as inflation data sends mixed signals. While the Fed favors the Commerce Department’s personal consumption expenditures prices measure, recent readings from the more widely followed consumer price index (CPI) have exceeded the central bank’s 2% target.
Clarida highlighted the Atlanta Fed’s measure of “sticky” inflation, which remains high, suggesting ongoing price pressures that could complicate the Fed’s policy decisions.
Furthermore, despite Fed Chair Jerome Powell’s assertion that financial conditions are tight, Clarida noted that conditions have actually eased compared to previous months.
“What I think is going on here is a delicate balance that [Powell is] trying to keep,” Clarida remarked. “Financial conditions will very naturally start to ease when they get the sense the Fed is done and [will start] cutting. Then, of course, that improves the economic outlook and potentially makes it harder to get inflation down to 2%.”
