On Friday, March 22nd local time, former Vice Chairman of the Federal Reserve, Richard Clarida, stated that stubborn high inflation may lead the central bank to take a more cautious stance on interest rate cuts this year.
Clarida served as Assistant Secretary of the Treasury in the Bush administration and was personally nominated by Trump in 2018 to succeed Stanley Fisher as Vice Chairman of the Federal Reserve, becoming the second most important person after Powell. In 2022, Clarida, who was involved in insider trading issues, resigned from the Federal Reserve and was replaced by Lair Brainard.
Currently, Clarida serves as a global economic advisor at Pacific Asset Management Corporation (PIMCO). In Friday's interview, Clarida told the media that his former colleagues need to be wary of price stickiness as it may hinder the plan of the world's most important central bank to relax monetary policy.
In this week's currency resolution, the Federal Open Market Committee hinted in the "dot matrix" released that officials overall believe that the year-end central bank interest rate will be 75 basis points lower than the current level. If interest rates are lowered by 25 basis points each time, it will need to be lowered three times, which is consistent with the view in December last year.
Regarding this, Clarida said, "This may be more like a wish than a prediction." "I hope the Federal Reserve can truly enter a data dependent mode, because if inflation is stubborn and sticky, then they should not implement three rate cuts this year."
The data released in 2024 shows that almost all inflation indicators in the United States are higher than expected, leading the market to doubt the "three rate cuts". However, some Federal Reserve officials believe that housing prices are slowing down, which is expected to pave the way for interest rate cuts.
Clarida stated that it is currently unclear internally how much interest rate cuts will be made this year, and the potential is very broad, with at least one rate cut expected.
Next Friday, the US Bureau of Economic Analysis will release the Federal Reserve's favorite inflation indicator - the February Personal Consumption Expenditure (PCE) Price Index. The overall PCE annual rate in January was 2.4%, with a core of 2.8%, both higher than the Federal Reserve's target of 2%, but still moving towards a slowdown overall.
However, the changes in the Consumer Price Index (CPI) have been disappointing, as the US CPI recorded an annual rate of 3.2% in February, showing signs of acceleration. The core CPI annual rate was 3.8%, still close to twice that of 2%.
The Atlanta Federal Reserve's "sticky price CPI" increased by 4.4% year-on-year, and the three-month annualized data even reached 5%, the highest level since April last year.
Source: Atlanta Federal Reserve
Clarida pointed out that "if the Federal Reserve were targeting CPI, we wouldn't even discuss interest rate cuts." He also pointed out that Powell had mentioned at a press conference that "the financial situation is very tight," but in reality it is much more relaxed than in November last year. The National Financial Situation Index tracked by the Chicago Fed is at its lowest level since January 2022, the most relaxed level in nearly two years.
Source: Chicago Federal Reserve
Clarida believes that the current situation will be a difficult problem that Powell needs to solve, because when the outside world believes that the Federal Reserve needs to start cutting interest rates to complete rate hikes, the financial situation will naturally begin to relax. "This will indeed improve the economic outlook, but it may also make it harder for inflation to fall to 2%."
