Richard H Clarida: US economic outlook and monetary policy
Speech by Mr Richard H Clarida, Vice Chairman of the Board of Governors of the Federal
Reserve System, at the Washington Policy Summit, sponsored by the Institute of International
Finance, Washington DC, 11 April 2019.
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Thank you for the opportunity to participate in the Institute of International Finance's Washington
Policy Summit. Before we begin our conversation, I want to share a few thoughts about the
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outlook for the economy and monetary policy.
Current Economic Situation and Outlook
The U.S. economy is in a good place and operating close to both of the Federal Reserve's
dualmandate objectives of maximum employment and price stability. Real gross domestic product
(GDP) rose about 3 percent last year, and in July, just a few months from now, the current
economic expansion almost certainly will become the longest on record. The unemployment rate
is near the lowest level recorded in 50 years, and average monthly job gains have continued to
outpace the increases needed over the longer run to provide jobs for new entrants to the labor
force. Average hourly earnings are showing a welcome increase consistent with a healthy labor
market, yet inflation remains near our 2 percent objective.
All that said, the incoming data have revealed signs that U.S. economic growth is slowing
somewhat from 2018's robust pace. Prospects for foreign economic growth have been marked
down, and important international risks, such as Brexit, remain. U.S. inflation as measured by the
core personal consumption expenditures (PCE) price index, which excludes volatile food and
energy prices and is a better gauge of underlying inflation pressures, has been muted. And some
indicators of longer-term inflation expectations remain at the low end of a range that I consider
consistent with our price-stability mandate.
The considerations I just mentioned have led most private-sector forecasters to project that
growth will continue in 2019 but at a somewhat slower pace than in 2018. At the Federal
Reserve, in our most recent Summary of Economic Projections, the median participant on the
Federal Open Market Committee (FOMC) projected that in 2019, GDP growth of 2 percent will be
the modal, or most likely, outcome; that core PCE inflation will rise to 2 percent; and that the
unemployment rate will fall a bit further, to 3.7 percent, by the end of the year. Again, these are
modal outcomes, and, of course, my FOMC colleagues and I should and do factor in risks on
either side of these projections in our policy deliberations.
Monetary Policy
Given this outlook for the U.S. economy, we decided at our March meeting that the current
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stance of monetary policy is appropriate. The federal funds rate is now in the broad range of
estimates of neutral--the rate that tends neither to stimulate nor to restrain the economy. Our
baseline economic projections see economic growth for the year as a whole running somewhat
above the Committee's median estimate of its longer-run trend and core PCE inflation remaining
near our 2 percent objective. For these reasons, we have indicated we can be patient as we
assess what adjustments, if any, will be appropriate to the stance of monetary policy.
At our March meeting, the Committee also released revised Balance Sheet Normalization
Principles and Plans, and it announced that the FOMC intends to slow the runoff of our securities
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starting in May and to cease the runoff entirely in September. This decision is the culmination of
discussions that we had over the previous four meetings about our operating framework and
reflects our desire to converge to a balance sheet that is no larger than it needs to be to conduct
monetary policy efficiently and effectively. In September, reserve balances likely will remain
above the minimum level, including a buffer, consistent with this goal. In that case, we anticipate
we will likely hold the size of our balance sheet at the level reached in September for a time
thereafter and let the gradual increase in other (nonreserve) liabilities, such as currency, slowly
shrink the level of reserves. Importantly, with this decision on the size of our balance sheet now
taken, we can turn our attention in future meetings to discussing and deciding on the maturity
composition of our System Open Market Account portfolio.
As you may know, last November the Federal Reserve announced that in 2019 we are
undertaking a System review of our monetary policy strategy, tools, and communications
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practices. Information about this review can be found on the Federal Reserve Board's website.
In this review, we will listen to a broad range of stakeholders at public events held around the
country, and we will draw on their insights as we assess how best to achieve and maintain
maximum employment and price stability in the most robust fashion possible. Taking these
viewpoints on board, the FOMC will begin its own discussions this summer on how we might
refine our framework, and we will provide a public assessment after the review is complete.
Thank you, and I look forward to our conversation.
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The views expressed are my own and not necessarily those of other Federal Reserve Board members or
Federal Open Market Committee participants. I am grateful to Brian Doyle of the Federal Reserve Board staff for
his assistance in preparing this text.
2
See Board of Governors of the Federal Reserve System (2019), "Federal Reserve Issues FOMC Statement,"
press release, March 20.
3
See Board of Governors of the Federal Reserve System (2019), "Balance Sheet Normalization Principles and
Plans," press release, March 20.
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Information about the review and the events associated with it are available on the Board's website at
www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications.htm.