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 35th Annual NABE Economic Policy Conference &quot;Promoting
Global Growth and Domestic Economic Security&quot;, Washington DC, 28 February 2019.
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Thank you for the opportunity to participate in the 35th Annual Economic Policy Conference of the
National Association for Business Economics. Before we begin our conversation, I want to share
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a few thoughts about the outlook for the economy and monetary policy.
Current Economic Situation and Outlook
The U.S. economy expanded at a robust pace in 2018, and my baseline outlook for 2019
foresees somewhat slower but still-solid growth in the year ahead. In July, just about four months
from now, the current economic expansion will become the longest on record. The Federal
Reserve is charged by the Congress with achieving and sustaining a dual mandate of maximum
employment and price stability, and the economy is as close as it has been in many years to
meeting these goals.
The unemployment rate is near the lowest level recorded in 50 years, and average monthly job
gains have continued to well outpace the increases needed over the longer run to provide jobs for
new entrants to the labor force. Most measures of nominal wage growth are running at or
somewhat above the 3 percent pace, and recent wage gains have been strongest for
lowerskilled workers.
Moreover, the strength of the labor market appears to have encouraged people to join the labor
force and others, who might have left it, to continue working. The labor force participation
rate-the share of people who are either working or looking for work--has moved up 1/2 percentage
point over the past year, and the participation rate of prime-age workers (those 25 to 54 years
old) has risen about 1-1/2 percentage points over the past few years.
Inflation, as measured by the 12-month change in the price index for personal consumption
expenditures (PCE), is estimated to have been a little bit below 2 percent of late, largely because
of recent declines in energy prices. However, core PCE inflation, which excludes food and
energy prices and tends to be a better indicator of future inflation, is estimated to have been
about 2 percent. Market-based measures of inflation compensation have moved lower, on net,
since last summer, though they have increased some recently, and some survey-based
measures of longer-term inflation expectations are little changed. That said, taken together, the
evidence suggests that measures of expected inflation are at the lower end of a range that I
consider to be consistent with our price-stability goal of 2 percent PCE inflation.
While my baseline outlook for growth, employment, and inflation is a positive one, a number of
crosscurrents that are buffeting the economy bear careful scrutiny. Global growth is slowing,
particularly in China and Europe. Global policy uncertainty remains elevated. And financial
conditions have been volatile, making efforts to extract signal from noise more challenging.
Monetary Policy
As I have indicated in recent speeches, monetary policy at this juncture needs to be especially
data dependent, with the federal funds rate now in the range of Federal Open Market Committee
(FOMC) participants' estimates of its longer-run neutral level. Moreover, with employment and
inflation now at or close to our dual-mandate objectives, the FOMC in its January statement
indicated it can afford to be patient as we assess the need for further adjustments in our policy
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stance. Going forward, we need, I believe, to be cognizant of the balance we must strike
between (1) being forward looking and (2) maximizing the odds of being right given the reality that
the models that we consult are not infallible. For example, were a model to predict a surge in
inflation, a decision for preemptive hikes before the surge is evident in actual data would need to
be balanced against the considerable cost of the model being wrong. Given muted inflation and
stable inflation expectations, I believe we can be patient and allow the data to flow in as we
determine what future adjustments to the target range for the federal funds rate may be
appropriate to strike this balance.
We also decided at our January meeting to maintain our current operating regime a "floor"
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system--for implementing monetary policy. The FOMC will continue to set the stance of policy
by establishing the target range for the federal funds rate. The interest on excess reserves rate
will be our primary tool to keep the federal funds rate in the target range. In this regime, we will
provide an ample supply of reserves in the banking system to ensure that we remain on the flat
portion of the reserve demand curve and that the federal funds rate is insulated from shocks to
reserve demand and supply. With this decision on our operating regime made, the Committee
can now decide on the appropriate timing and pace for concluding our balance sheet drawdown.
In the longer run, the ultimate size of the balance sheet will be determined by the demand for
Federal Reserve liabilities such as currency and reserve balances.
Finally, in November, we announced a review of the Federal Reserve's monetary policy strategy,
tools, and communications practices. In this review, we will listen carefully to a broad range of
stakeholders offering a full range of perspectives from across the country, and we will draw on
these 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 will provide a
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public assessment after the review is completed.
Thank you for your attention, 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.
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See Board of Governors of the Federal Reserve System (2019), "Federal Reserve Issues FOMC Statement,"
press release, January 30.
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See Board of Governors of the Federal Reserve System (2019), "Statement Regarding Monetary Policy
Implementation and Balance Sheet Normalization," press release, January 30.
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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.