The vice chairman of the Federal Reserve on Thursday identified factors that would cause the central bank to lower interest rates — but didn’t point out what could cause it to move rates in the opposite direction.
The speech from Richard Clarida to the Economic Club of New York appears to be moving the Fed slowly in the direction where markets already are, toward an interest-rate cut at the end of the year.
Clarida did say the U.S. economy is in a “very good place.” But he quickly added what could cause the Fed to alter its stance, which has been unchanged since December.
“However, if the incoming data were to show a persistent shortfall in inflation below our 2% 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 Committee would take into account in assessing the appropriate stance for monetary policy,” he said.
Fed officials have been insisting over the last few months that inflation will pick up from levels that are running short of its target. Data released earlier Thursday revised lower inflation readings from the first quarter. Meanwhile, the U.S. is engaged in fraught trade negotiations with China, as Britain faces a deadline to exit the European Union.
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Clarida’s other comments also fit a more dovish stance.
He pointed out the structural rate of unemployment consistent with so-called maximum employment might be lower because of higher educational attainment and a larger proportion of older workers in the workforce today. He said that rate may extend below 4%. The unemployment rate was 3.6% in April but hasn’t stirred up inflation.
Clarida also said prime-age participation rates remain somewhat below levels achieved in the 1990s and may still have some more room to run.
He said price inflation appears less responsive to resource slack than it did in the past.
Clarida said longer-term inflation expectations sit at the low end of a range consistent with its price-stability mandate.
U.S. stocks DJIA, +0.17% ended higher. The yield on the 10-year Treasury TMUBMUSD10Y, -2.63% fell slightly to 2.22%.