Fed’s Clarida: Haven’t Changed Mind vs Negative Rates

Federal Reserve Vice Chair Richard Clarida Thursday said he has not changed his mind, that there’s no upside to purposely move to negative rates.

Speaking in a webinar sponsored by the New York Association for Business Economics, Clarida also underlined the points made Wednesday and previously by Fed Chair Jay Powell, that the path forward through the pandemic is uncertain and that the central bank will be “forceful…aggressive” in using all its tools to support market functioning and the economy.

In October of 2019, Fed policymakers “did receive a briefing from staff on negative rates and some of the international experience. And as the minutes to the October 2019 meeting will show not one, not two, but all 17 participants around the table were in agreement that in the US context we did not feel at that time that negative rates would be a worthwhile approach.”

He added, “Nothing that has happened since then has changed my mind about that.”

On yield curve control, Clarida said the Fed was a pioneer in that area in the World War II era and that “down the road” he would like a briefing on how other central banks are using it.

“At one level, it’s a natural complement to calendar-based guidance,” he said. “Indeed the RBA is doing that very specifically,” he said, adding that they’re saying “that they anticipate rates are on hold for at least three years, they’re providing three years of term funding to commercial banks and they are endeavoring to keep the yield on three or four sovereign bonds in a pretty tight range.”

The pandemic is accompanied by “an extraordinary amount of uncertainty about both the depth and the duration of the economic downturn”, he added. “Because the course of the economy will depend on the course of the virus and the public health policies put in place to contain it, there is an unusually wide range of scenarios” for the “next several years”.

Clarida said he believes it will take “some time” for economic activity and the labour market to recover. “I do project that the economy will begin to grow and that unemployment will begin to decline starting in the second half of this year,” he said.

It may take a few months to figure out how the economy is going to weather the virus shock. “We are just really in an uncharted situation right now and I think that my own sense is that we’ll begin to get a better sense of the scenario, in the trajectory that the economy is on, in the early fall.”

The Fed is using both its balance sheet and low rates and, “Additional support from both monetary and fiscal policies may be called for,” he said.


Julie Ros

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