The Federal Reserve isn’t making a sharp U-turn when it comes to raising interest rates over the coming year, even amid growing concerns about a global slowdown, according to a top official.
After gradually hiking rates beginning in December 2015, the US central bank backed off in January, raising questions about whether policymakers were worried they’d overcorrected – or were bowing to political pressure from President Donald Trump, who has broken precedent by openly voicing his displeasure about rate hikes and personally attacking the Federal Reserve chairman he appointed, Jerome Powell.
Vice chairman Richard Clarida said in an exclusive interview with CNN’s Richard Quest on Wednesday that policy makers are waiting to see how things shake out before making their next move.
“We can afford to be patient and we can afford to let the data come in and tell us a little bit about where the global economy is going,” Clarida said. “We think policy is in a good place right now.”
He also pushed back against suggestions that Trump’s repeated attacks weighed on policymaking.
“Well let me just say this very clearly and – and without any equivocation,” Clarida said. ” We have a very simple mandate given to us by the Congress, it’s a dual mandate. Our job is to use our tools to achieve maximum employment, price stability. That is the only thing that motivates me and my colleagues. We have a process here. It’s not just us, we have Reserve Bank presidents and I can tell you I don’t feel the pressure. The only pressure I feel is to do the best job we can to keep the economy at full employment and price stability.”
Clarida added that he and Powell discussed “the economic outlook and global outlook” at a rare White House dinner with Trump earlier this month.
Since the start of the year, top officials at the Fed, including Powell, have made clear they plan to exert a “patient approach” on interest rates hikes, going so far as to change their official policy statement to reflect that central bankers are weighing the potential economic effect of a number of global uncertainties. The list includes ongoing trade tensions between the US and China, the 35-day partial government shutdown and the ongoing Brexit negotiations between the United Kingdom and the European Union.
That dovish sentiment was underscored yet again in minutes of the Fed’s January meeting also released on Wednesday. In January, the Fed sent a strong signal it was inclined to put interest rate hikes on hold and was prepared to shrink its balance sheet.
“A patient posture would allow time for a clearer picture of the international trade policy situation and the state of the global economy to emerge, and, in particular, could allow policymakers to reach a firmer judgment about the extent and persistence of the economic slowdown in Europe and China,” the minutes read.
Adding to a murkier economic picture for Fed officials is the limited amount of data that wasn’t released by the Commerce Department during the partial government shutdown, the longest in American history.
“We don’t have all the data we usually do right now, so it’s not even clear how much of a slowdown, if any, that we’re seeing in the economy,” said Clarida. “The data was delayed, of course, by the government shutdown.”
Central bankers aired a number of potential downside risks in their January two-day policy setting meeting in Washington, including a sharper-than-expected slowdown in global economic growth, particularly in China and Europe, a rapid waning of fiscal policy stimulus and even tighter financial conditions, according to the minutes.
Policymakers have made clear they plan to take a wait-and-see approach to watch as the US economy evolves against such a significant number of challenges.
“The case for raising rates has weakened somewhat,” Powell told reporters at a press conference in January. “We believe we can best support the economy by being patient and evaluating the outlook before making any future adjustment to policy.”
The central bank has penciled in two rate hikes in 2019.
In his interview, Clarida warned a sharp slowdown in China, if it were to happen, an outcome the Fed currently doesn’t foresee, would have consequences for all the economies of the world.
He also downplayed direct risks of Brexit on the United States and minimized the economic impact the ongoing trade rift with China has had on the economy thus far.
“It’s not yet a trade war,” said Clarida. “So far that’s not had a big impact on the economy.”
The Fed has also been “very attentive” to ensure that if a hard Brexit were to occur, that the global financial system and the plumbing would continue to function – an outcome Clarida expressed confidence over.
In the minutes, central bankers made a point of stating given the range of headwinds to the US economy maintaining rates “posed few risks at this point.”
In January the Fed agreed to keep the federal funds rate, which influences the costs of mortgages, credit cards and other borrowing, to a range of 2.25% to 2.5%.
