The U.S. central bank can afford to take a wait-and-see stance on interest rates, said Fed Vice Chairman Richard Clarida on Thursday, joining the chorus of officials who say patience is the new watchword.
“We begin the year as close to our assigned objectives as we have in a very long time. In these circumstances, I believe patience is a virtue and is one we can today afford,” Clarida said, in remarks prepared for the Money Marketeers of New York University.
Fed Chairman Jerome Powell and other senior Fed officials have said they favor stepping back until the central bank better understands the dichotomy between their basically upbeat view on the economic outlook and the distressed signal being sent by financial markets.
Some Fed officials have said they expect the market turmoil to subside.
In his speech, Clarida said that the central bank is facing “crosswinds” from growth prospects in other countries and overall financial conditions that have tightened materially.
“If these crosswinds are sustained, appropriate forward-looking monetary policy should respond to keep the economy as close as possible to our dual-mandate objectives of maximum employment and price stability,” he said
In a footnote, Clarida cited his prior research that said the Fed could offset exogenous declines in demand by promising fewer interest-rate hikes than the market had expected.
At the moment, the Fed has penciled in two interest-rate hikes this year.
The Fed vice chairman also said he was open to making adjustments to the steady shrinking of the central bank’s balance sheet.
Some analysts argue the balance sheet runoff is damaging financial markets.
“If we find that the ongoing program of balance-sheet normalization or any other aspect of normalization no longer promotes the achievement of our dual-mandate goals, we will not hesitate to make changes,” Clarida said.