DALLAS (Reuters) - The U.S. economy is operating at near full employment, and with inflation near the Fed’s 2-percent goal and upward pressures “muted,” the point of policy now is to keep it there, Federal Reserve Vice Chair Richard Clarida said on Monday.
“We think that we have the ability to be patient in terms of looking at the data” to decide where to set interest rates, Clarida told Dallas Fed President Robert Kaplan in an interview at the Dallas Fed’s headquarters in front of an audience that included local business leaders and several Fed policymakers.
“The U.S. economy is in a good place right now....It’s a good situation to be in, and we really want to do whatever we can to help support and maintain the economy,” Clarida said. Fed Chairman Jerome Powell, who gives an update on monetary policy to Congress on Tuesday, has also described the economy as being in a good place.
The Fed raised rates four times in 2018, but last month said it would be patient in deciding when to tighten policy again, if at all. Investors interpreted the move as indicating that the Fed’s three-year push to raise rates had ended.
Clarida flagged some risks to the U.S. economy, including a slowdown in Asia and Europe that are “definitely a relevant factor” to Fed policy.
He also noted that while the Fed has some room to lower rates and otherwise fight any future downturn with monetary policy, other central banks around the world are stuck with rates near where they were when they were in full crisis-fighting mode.
“That obviously, on balance, makes the global economy more fragile,” Clarida said.
Clarida downplayed concern over the flat U.S. yield curve that some investors believe signals a rising chance of a recession, saying that many factors, including global demand for U.S. Treasuries, are pushing long-run rates down. But he said he will not ignore signals from financial markets, even as he tracks the real economy.
“You can’t be handcuffed to it. There’s a lot of noise, but there is some signal in financial market data,” Clarida said.
Asked about the Fed’s $4 trillion balance sheet, Clarida said that demand from banks for reserves and demand for currency from the rest of the world means that the Fed will need a bigger balance sheet than it did before the crisis, but said the Fed had not yet decided just how big it should ultimately be.
Fed policymakers have indicated they will likely stop shrinking the balance sheet before the end of the year.
Reporting by Ann Saphir; Editing by Tom Brown and Lisa Shumaker
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