The Federal Reserve can "afford to be patient" and wait to see whether increased uncertainties on the economic outlook end up substantially weighing on growth, Fed Vice Chairman Richard Clarida said Jan. 10.
Clarida said in prepared remarks the U.S. economy is entering 2019 under favorable conditions, with GDP likely rising by at least 3% in 2018 and monthly jobs gains continuing. But the U.S. economy is facing some risks given that global growth prospects "have moderated somewhat in recent months" and financial conditions have tightened, he said.
Inflation has "surprised to the downside recently" and it is unclear whether the Fed has hit its 2% inflation goal on a sustained basis, Clarida said. The benign outlook on inflation means that the Fed can "afford to be patient as we see how the data evolve in 2019 and as we assess what monetary policy stance is warranted to sustain strong growth and our dual-mandate objectives" of low unemployment and stable prices, he said.
"In these circumstances, I believe patience is a virtue and is one we can today afford," Clarida said, echoing earlier comments from Fed Chairman Jerome Powell advocating for a wait-and-see approach.
If the economic crosswinds continue, the Fed should be ready to take action and "appropriate forward-looking monetary policy should seek to offset them," Clarida said. A footnote in his speech pointed to a 1999 paper he co-wrote, outlining how central banks can offset external dips in growth by adjusting expectations of where interest rates are going.
The Fed took a step toward that in December 2018, when it raised interest rates for a fourth time in the year but signaled it was now penciling in two rate hikes for 2019, down from an earlier projection of three. Investors have grown skeptical recently that the Fed will opt for more rate increases this year, and some are even anticipating the Fed may cut rates.
Clarida said "monetary policy is not on a preset course" and that the Fed will take a data-dependent approach as it weighs future changes to interest rates.
"I will closely monitor the incoming data on these global economic and financial developments as, at each future FOMC meeting, I consider what adjustment to our monetary policy stance is warranted to achieve and sustain our dual-mandate objectives," he said.