Federal Reserve Vice Chair Richard Clarida speaks with Yahoo Finance [Transcript]

·13 min read

Richard Clarida, vice chair of the Federal Reserve Board of Governors, spoke with Yahoo Finance to discuss inflation risks and what lies ahead for Fed policy.

Below is a transcript of his appearance on May 25, 2021.


BRIAN CHEUNG: Joining us here on Yahoo Finance in an exclusive is Vice Chairman of the Federal Reserve Board that's Richard Clarida. Thank you so much for joining us this afternoon. I wanted to ask you just kicking things off we're going to get an interesting print on inflation that's PCE on Friday, in addition to a jobs report next Friday. Just curious what your updated outlook is on the economy, as we await those very two important data points, at least from the Fed’s view.

RICHARD CLARIDA: Thank you, enjoy having a chance to do the show. The outlook for the economy in terms of economic activity is very, very positive. My outlook is for growth somewhere north of 6% this year, possibly 7%. If we get that in GDP, it’d be the fastest four quarters of growth in 35 years. Of course, we have to remember the economy was thrust into a very deep hole last year with the pandemic and the mitigation efforts put in place. We have a resilient economy, a lot of policy support and the vaccines. And so certainly very constructive on economic activity. In terms of the labor market, I think the most recent employment report really highlights a fair amount of near-term uncertainty about the labor market. We're still about 8 million jobs short of where we were 15 months ago, and it may take more time to reopen a $20 trillion economy than it did to shut it down. You know, at the current pace of the last three months of a half million jobs per month, it would take until August 2022 to recoup those 8 million jobs. On the inflation outlook, obviously the CPI number that we got recently was a very unpleasant surprise. We and other forecasters had expected both PCE and CPI inflation to move up on reopening but that increase certainly caught my eye and others’ attention, Brian I continue to believe as my baseline case that this will prove to be largely transitory and I think the details of that recent report are consistent with that, but let me also emphasize, we're going to be looking at the data very closely in coming months. And if in the risk case, the upward pressure on inflation were to prove to be more persistent and to put upward pressure on inflation expectations we have the tools and I'm convinced that we would act to counteract and bring inflation down to our long-run goal of 2%.

BRIAN CHEUNG: So I want to elaborate on that point that you just made about the expectation that we may not get a lot of those 8 million jobs, at least compared to pre pandemic levels back until August 2022, does that imply that that's how long it's going to take before the Fed then starts to pull back on some of the aggressive policy measures that you've put in place since the pandemic?

RICHARD CLARIDA: I was really making the point that if the last three month average where to continue that it would take that amount of time. I myself think that the pace of labor market improvement will pick up. I think that, you know, we have to remember we still have tens of millions of Americans who have not yet been vaccinated. I think we'll have a— we will have a much better sense. We'll have children returning to school in most of the country. We will have other factors that I think will lead to a pickup in employment as my baseline. We want to make— Our criteria, as you know as a seasoned Fed watcher, is that we want to make substantial further progress towards our maximum employment and price stability goals and we’ll be attuned and attentive to the data as it's coming in on that.

BRIAN CHEUNG: So, you said last week that “monetary policy is as much about risk management as it is the baseline.” I found that very interesting commentary because everyone has a different definition for what the biggest risk is going to be. We heard from Larry Summers in an op-ed this morning that he said overheating not excessive slack is the biggest risk. In his view Is there a risk that the Fed, with its new reaction function, might have to hit the brakes too abruptly in a way where that risk management could really become an issue for the central bank?

RICHARD CLARIDA: That's a good question. So again, I think I like the opportunity, because a big important part of policy is risk management. There's a lot of focus on our baseline view, which does not see a persistent threat to our price stability mandate, but of course there is a risk case. There's also a downside risk case unfortunately on the virus and new variants and the fact that the rest of the world is not vaccinated. But focusing now on the upside case, we have enormous pent-up demand in the economy, with monetary and fiscal policy support. We also have enormous potential pent-up supply. Those 8 million jobs that I talked about and so it's going to take some time to get a clearer sense of how supply and demand will balance. Now in the risk case which Larry and others have focused on, in the risk case where these pressures are more persistent, and then put our price stability mandate at risk, you know, we will recognize that and through our communication and our tools, I think we will be able to offset that in a way that would be supportive of maintaining the economic recovery so that that's the way I'm looking at it.

BRIAN CHEUNG: So if it's not your base case scenario as I understand it for that to be the case, we are however hearing some commentary that there is some concern that could be the case. We heard from Philadelphia Fed President Patrick Harker in addition to Dallas Fed President Robert Kaplan saying that they would prefer to have discussions at least on tapering, pulling back the quantitative easing program pace, sooner rather than later. Do you agree on that point or is that type of risk threat, not quite there, at least in your view right now?

RICHARD CLARIDA: I think the minutes, stated well my thinking and obviously, most of the committee. It may well be the time that— there will come a time in upcoming meetings we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases, obviously that's not something that was the focus of the April meeting. Again, I think it's gonna depend on the flow of data that we get. Also I think it's important to appreciate that the pandemic that the shut down the economy last year was really unprecedented I think in everyone's lifetime. You'd have to go back to 1918 probably. and shutting down the economy put very substantial downward pressure on prices, CPI inflation I think was 1.3 or 1.4% and that turned out to be transitory. Reopening the economy is clearly, as we saw in the CPI report, putting some upward pressure on inflation, And so we're doing what statisticians call a signal extraction exercise in a complex period. So we need to be humble, we need to acknowledge there's a risk case on both sides, and I would expect as the data comes in throughout the rest of the year, we will at a point, as a committee, be able to assess that and communicate what that means for meeting our substantial progress test.

BRIAN CHEUNG: So let's talk a little bit more about communication. We saw markets, maybe not go crazy, but they did kind of jitter after the minutes that showed there were some participants that felt that rapid progress is possible, where they might want to start tapering earlier rather than later. Do you feel like markets are getting the message? The Fed has a new reaction function because of the changes to the framework made at Jackson Hole some time ago, you were formerly a Fed watcher for many years before you went to the Fed, so you have an interesting perspective on both sides. Are they reading you guys right?

RICHARD CLARIDA: I think so. I think broadly obviously we can find days in particular events but I think broadly our new reaction function has come to be well understood. I think the surveys that the New York Fed conducts will show that. But I think the important point to remember— I think the biggest change is that we’re really more outcome-based than outlook-based. So our underlying goals, Brian, have not changed. We want to get to the maximum level of employment consistent with price stability and keep it there. We continue to define price stability as 2% in the long run so that's not changed. But what we have said is that we want inflation to average 2% over time so as to keep inflation expectations well anchored. And that will allow me to get in a plug for a staff index. The Fed staff has developed an index which I'm a big fan of, it's called the index of common inflation expectations, and it's essentially an agnostic, statistical approach to extract the common element in more than 20 different indicators of expected inflation. And that index is right around 2% right now, it drifted down a bit in the pandemic, it's drifted up. But I would argue that it's very much in a range that’s consistent with well anchored inflation expectations, and we have to keep a close eye on that going forward, at least I will.

BRIAN CHEUNG: So when it comes to looking at inflation, obviously inflation expectations, a big part of where you might see inflation going in the future. You can look at market based measures on the TIPS market you can look at survey based measures. But it seems like everything not just inflation, but even employment data, is very noisy right now so are you holding more water, if you will, in actual realized inflation or inflation expectations?

RICHARD CLARIDA: Speaking for myself, yes, in fact I'm putting a lot of weight on inflation expectations because the historical experience in the last 30 years and macroeconomics indicates that keeping inflation expectations— is essential for achieving our price stability goal. It actually helps us achieve our maximum employment goal as well. But you are correct. I think there is a signal. There's always signal and noise in data and unfortunately we’re in a period where the ratio of signal to noise is probably lower than on average, which is why we're looking at a wide range of indicators. I should also say that in the labor market, in addition to looking at indicators of employment and participation, and the JOLTS data for example, job finding data. It's also important that we get data on wages, compensation, productivity as well. In the last cycle, even though the unemployment rate fell to 3.5%, we did not see wage gains that were excessive relative to productivity and our inflation goals. And certainly going forward that will be a key thing for us to monitor as well. Right now that is not the case, although I would point out that even though this is a very deep shock to the economy, if you look, for example, the Atlanta Fed wage tracker or the Employment Cost Index, They hold up pretty well during the pandemic, which for those workers who kept their job was a good thing. So certainly something I'll be looking at quite closely.

BRIAN CHEUNG: So can we talk about financial stability for a little bit because it seems like a lot of people are paying attention to inflation and employment obviously. But financial stability could be a caveat to your reaction as well. A lot of people are watching volatility in cryptocurrency markets as of the last week. We know that bank exposure in that asset class has been heating up a bit in recent times, does that, is that any of that concern you? We heard from St Louis Fed President James Bullard here on Yahoo Finance, he said, a lot of these cryptocurrencies are worthless, what do you have to say on that space?

RICHARD CLARIDA: Obviously there are a number of them so you don't want to paint with too broad a brush. But I don't view cryptocurrencies as really either a store of value, or a medium of exchange. Blockchain technology is a technology, which obviously has advantages in particular applications whether or not it involves crypto. But I don't think of crypto broadly as really either a store of value or a medium of exchange, it may serve a role. It may not. But I don't think of it as really a substitute for money in any way that I would recognize, as someone who used to teach money and banking very happily decades ago. So it doesn't meet my definition.

BRIAN CHEUNG: Are there any other financial stability risks, we saw the Archegos episode. We know that the Fed had that Financial Stability Report where it's watching maybe things outside of the traditional banking system, maybe in the hedge fund space. What's the top thing that you're watching that could be a risk, as we continue to have this easy money policy?

RICHARD CLARIDA: One thing I really found, a number of things, during the Fed, is the Fed has in place a very systematic and robust framework for assessing financial stability. There are really four pillars. It looks at vulnerabilities in terms of valuation, in terms of leverage, liquidity, and valuation. And those reports by the staff are released twice a year. The committee also gets briefings on those. So I will just on that point state restate what Chair Powell said recently I believe at his press conference: that we're obviously very attentive and attuned and looking at a broad range of indicators of financial stability. But we think financial stability risks now are manageable.

BRIAN CHEUNG: And then lastly, I just wanted to ask, there's a lot of question about the musical chairs that could be happening within the Federal Reserve Board. Your term on the Fed expires January 2022. Have you had discussions with anyone in the administration about renomination?

RICHARD CLARIDA: I have not had any such discussions, and I am— I am enjoying being Fed Vice Chair enormously, it's been an enormous privilege to do it. And I'm eager to get as much done as I can in my remaining time in this position.

BRIAN CHEUNG: And I'm sure it'll be very interesting, especially given what everyone has gone through in the last year. But again Federal Reserve Vice Chairman Richard Clarida joining us here on Yahoo Finance, thank you so much for joining us.

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