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Fed's Clarida states that interest rates are "much closer" to neutrality

Vice President of the US Federal Reserve Richard Clarida on Tuesday expressed a cautious stance on how the central bank should proceed to raise interest rates.

"A monetary policy strategy needs to find a way to combine incoming data and an economic model with a good dose of judgment – and humility! – to formulate, then communicate, a key rate path that best fits our goals, "he said in prepared remarks.

According to Clarida, the FOMC, which defines the Fed's monetary policy, is "much closer" to a so-called neutral level, which is neither stimulating nor restrictive in relation to the beginning of the upside cycle. rate in December 2015..

"How close is the judgment and the views on the FOMC are varied," he said.

The question of the neutral rate – called "r *" in Fed circles, is crucial as the authorities consider the way forward. Fed Chairman Jerome Powell shook the markets at the start of October, saying that the current benchmark target range of 2% to 2.25 for benchmark funds is "far" from the neutral position.

Clarida said it was important that Fed officials continually update their views by indicating the neutral funding rate and the natural unemployment rate, or "u *".

"This learning process on r * and u * upon the arrival of new data argues in favor of a gradual normalization of the policy, as it will allow the Fed to gather more money." information from the target rate final destination and the unemployment rate to a reasonable level, when inflation is close to our target of 2%, "he said.

A tumultuous period for the market, in which the S & P 500 came in and out of a 10% correction, left the Fed and the market at a considerable distance from each other . While the market is expecting a rate hike at the FOMC meeting in December, it is currently planning a new deal in 2019. The Fed's current forecast is for three more hikes next year. .

"US monetary policy has historically depended on and will depend on data, as incoming data will be revealed at every meeting of the Federal Open Market Committee, where the economy is at the moment of each. meeting the target objectives of monetary policy, "said Clarida.

His speech did not mention the current volatility. Instead, he gave a broadly bright vision of the economy and said he expected strong growth and moderate inflation.

"The fundamentals of the US economy are robust, as evidenced by the strong growth in gross domestic product and a surprising job market for nearly two years," he said.

He has been cautious about inflation, which remains slightly below the Fed's target of 2%, and said policymakers should be careful not to adopt such an aggressive rate policy to undermine the recovery. to caution and risk overheating.

In addition to price stability, the Fed's mandate is full employment. With a 3.7% unemployment rate, many Fed officials and economists believe the economy could be out of date.

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