Fed’s Richard Clarida questions whether market really expects a cut

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Federal Reserve Vice Chairman Richard Clarida took issue with suggestions that investors expect the central bank to cut interest rates in the middle of this year as he called the economy fundamentally sound.

Federal Reserve Vice Chairman Richard Clarida
Federal Reserve Vice Chairman Richard Clarida

While trading in federal funds futures imply a reduction, Clarida said that such readings are affected by technical factors and noted that separate surveys of Fed watchers show they don’t expect a cut.

“The fundamentals in the U.S. are strong,” he said in an interview on CNBC television on Thursday. “It’s a good picture.”

Fed officials left interest rates unchanged in a range of 1.5% to 1.75% at their Jan. 28-29 gathering and said the setting was “appropriate” to sustain the U.S. economic expansion and achieve the central bank’s goals of maximum employment and stable prices.

Clarida said the central bank was closely monitoring the coronavirus but that was too soon to tell how it would affect the U.S. economy.

The deadly outbreak has killed more than 2,000 and infected an estimated 75,000 mostly in China, while disrupting travel and commerce worldwide. The Asian nation’s economy is under increasing strain from shutdowns imposed to curb the virus, with the distress threatening to cut workers’ wages and drive companies to seek government aid

“It’s obviously something that is probably going to have a noticeable impact on Chinese growth, at least in the first quarter of this year,” Clarida said.

He characterized financial-stability risks as moderate. While U.S. stock prices are near record highs, Clarida said valuations must be judged against the level of interest rates.

“We are also in a world of structurally low interest rates,” the vice chairman said. “You have to factor that into the equation.”

Clarida said he would leave it to others to say whether the Fed’s effort to inject permanent liquidity into the money markets through Treasury-bill purchases had pushed up stock prices.

He did though repeatedly say that the bill buying was a technical operation aimed at relieving stresses in those markets.

“We are going to be planning to scale back those T-bill purchases in June,” he said.

Bloomberg News
Monetary policy Richard Clarida Federal Reserve FOMC