Federal Vice Chair Richard Clarida stated on Thursday that there is no need for a rate cut as the US economy is “in a good place” with an appropriate interest rate.
- Clarida said that the current interest rate was appropriate, but subject to change should economic conditions take a turn for the worse.
- The market is expecting a rate cut, and Clarida outlined the conditions under which that would be considered.
- He pointed to the health of the economy, citing near-neutral inflation rates and low unemployment.
While Clarida stated that no interest rate cut is planned at this time, the market expects one, a position strongly supported by the Trump administration. Clarida said at a speech at the Economic Club of New York that poor inflation pressure would contribute to the Fed opting to cut rates.
“If the incoming data were to show a persistent shortfall in inflation below our 2 percent objective or were it to indicate that global economic and financial developments present a material downside risk to our baseline outlook, then these are developments that the [Federal Open Market Committee] would take into account in assessing the appropriate stance for monetary policy.”
Clarida added “Midway through the second quarter of 2019, the U.S. economy is in a good place. By most estimates, fiscal policy played an important role in boosting growth in 2018, and I expect that fiscal policies will continue to support growth in 2019.”
Having someone like Clarida acknowledge that there's a link from labor market conditions to wage growth to the labor share, and not just to inflation, seems like an important step forward.
— JW Mason (@JWMason1) May 30, 2019
Market and Fed Face Off
The Fed’s benchmark funds rate, the basis for most consumer rates, has a target range of 2.25% - 2.5%, and Clarida states that the current economic data shows that this is the correct range. However, markets have opposing views. The volatile futures trading market has two rate cuts forecast before January, although the Fed is holding firm to its patient approach outlined last year.
After a 31% GDP boost in Q1 2019, the US economy is losing momentum. The ongoing trade war and a general global slowdown are both factors fueling concerns about economic conditions and corresponding interest rates.
Gold is trading at $1,286.72/oz, up 0.48% today with a high of $1,288.67/oz and a low of $1,275.22/oz. The market may be under the influence of multiple reports released today indicating a downwardly revised Q1 GDP, a drop in pending home sales, and a bump in jobless claims.