The former vice chair of the central bank stated on Friday that high inflation could potentially push the Fed into a more cautious stance as the year progresses when it comes to cutting interest rates, which is bad news for the American people as it means relief from the high cost of living and low purchasing power of the dollar is nowhere in sight. Guess we might have to start considering literally selling an arm and a leg on the black market to buy groceries. Thanks, Bidenomics.
According to CNBC, “Richard Clarida, who served as Fed governor until January 2022 and is now a global economic advisor at asset management giant Pimco, said his former colleagues need to be on guard against sticky prices that could thwart plans to ease monetary policy this year.”
The Federal Open Market Committee had a meeting recently where it pointed toward decreasing the rates three times during the year, assuming quarter percentage point intervals. Chairman Jerome Powell went on to say that inflation going down, along with a strong economy provides room for policymakers to make cuts.
“This may be more of a hope than a forecast,” Clarida said during an interview on CNBC’s “Squawk Box.” “I do hope that the Fed really moves into data-dependent mode, because there can be a very good case if inflation is sticky and stubborn that they shouldn’t deliver three cuts this year.”
Markets also are expecting three cuts this year, though that pricing has been scaled back after data to start the year showed inflation higher than expected.
Fed officials are banking that elevated shelter inflation is on its way down, paving the way to lower their key borrowing rate from its highest level in more than 23 years. Clarida, however, said the extent to which the Fed can cut is unclear.
“Under a pretty broad range of scenarios, they’re going to get at least one cut in this year,” he remarked.
The math comes out a bit different as the inflation data sends mixed signals.
The Fed prefers the Commerce Department’s measure of personal consumption expenditures prices, with a particular focus on the core reading that excludes food and energy. The headline 12-month PCE reading for January was 2.4% and core was at 2.8% — both above the Fed’s 2% goal but headed in the right direction.
Back in February, the consumer price index sat at 3.2 percent for headline and 3.8 percent for core, which was above the central bank target. The Atlanta Fed’s measure of “sticky” inflation was at 4.4 percent for a 12-month basis and was then marked even higher at 5 percent on a three-month annualized basis, which was the highest seen since April of 2023.
“If the Fed were targeting CPI right now, we wouldn’t even be discussing rate cuts,” Clarida explained.
Clarida then pointed out that despite Powell saying financial conditions are “tight” they are “a lot easier than they were in November.” Well, that’s at least a little good news, right? You take every “W” you can get when you’re in dire straits.
“What I think is going on here is a delicate balance that [Powell is] trying to navigate,” Clarida commented in conclusion. “Financial conditions will very naturally start to ease when they get the sense the Fed is done and [will start] cutting. Then of course that improves the economic outlook and potentially makes it harder to get inflation down to 2″ percent.