The U.S. economy remains in a good place but the global picture is worsening, the second-highest-ranking official at the central bank said Friday.
Fed Vice Chairman Richard Clarida defended the central bank’s decision to cut its benchmark rate by a quarter percentage point on Wednesday this week.
Fed officials were divided over the economic outlook at that meeting. Three officials dissented in this week’s vote, the most “no” votes at a single meeting since 2016.
St. Louis Fed President James Bullard, one of those who broke with the consensus, earlier Friday made the case for a more-aggressive half-point cut.
At the same time, Boston Fed President Eric Rosengren said the rate cut was unnecessary and created bad side effects.
In an interview on CNBC, Clarida said the “center of gravity” on the rate-setting Federal Open Market Committee was for the second quarter-point cut in as many months.
Clarida tried to paint the dissents in a positive light, saying the disagreements were actually a sign of strength.
Economists said the divisive debate makes the outlook for interest rates cloudy at a pivotal time for the central bank, with talk of a recession louder than at any time in the decade-long expansion.
Clarida stressed the FOMC would make interest-rate decisions on a “meeting-by-meeting” basis going forward.
But reading between the lines, there was a dovish bias to many of Clarida’s comments.
Tom Porcelli, chief U.S. economist at RBC Capital Markets, said Clarida is “definitely” one of the seven Fed officials who indicated in the dot plot that another rate cut would be appropriate this year.
First of all, Clarida downplayed the risk of financial instability from an easy policy stance that Rosengren had stressed.
Right now, the majority of Fed officials do not see elevated risks of financial instability, he said.
And secondly, the Fed vice chairman highlighted the grim global economic picture.
“We clearly have a slowing global economy” that is “broader” than the trade tensions between the U.S. and China, Clarida said.
“There is a slowdown in global capital spending and global manufacturing and also some pretty important disinflationary forces,” he added.
And these factors have been getting worse since the beginning of the year, he said.
Earlier this week, the Organization for Economic Cooperation and Development downgraded its assessment of the global economy to the worst growth rate since the financial crisis.
Despite fears about the economic outlook, stocks
were near record highs Friday after reports surfaced in Politico that the Trump administration was going to exempt hundreds of Chinese products from tariffs.