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WASHINGTON—Federal Reserve Vice Chairman Richard Clarida endorsed the central bank’s current plans to gradually raise interest rates and highlighted reasons why stronger economic growth might not lead to an inflation upturn that requires more aggressive rate increases.
Mr. Clarida, who joined the Fed’s board last month, said in remarks set for delivery in Washington on Thursday that the economy was as close to meeting the Fed’s goals to boost employment while keeping prices stable as it had been in a decade. The key question now, he said, is how to preserve those gains.
After years in which the central bank held rates at very low levels to help boost economic growth and hiring, Mr. Clarida said the Fed’s current rate stance was providing support to an economy that no longer needed it, requiring “some further gradual adjustment” to raise interest rates.
“The risks that monetary policy must balance are now more symmetric and less skewed to the downside,” he said in his first public remarks since being sworn in last month.
Echoing Fed Chairman Jerome Powell, Mr. Clarida said the Fed needed to manage against the risk that officials could short-circuit the expansion by raising rates too fast and that they could move too slowly, leading to an increase in inflation “that could be costly to reverse.”
Fed officials raised their benchmark federal-funds rate a quarter percentage point last month to a range between 2% to 2.25%. Officials have signaled they expect to raise rates again this year, likely in December.
Mr. Clarida’s prepared remarks didn’t address recent market volatility that has led to a slide in stock prices. Nor did he address recent criticism from President Trump, who has said the Fed shouldn’t need to raise rates right now.
His remarks instead focused on the importance that inflation and expectations of future inflation will play in forming a policy consensus over how to set rates next year.
One camp of Fed officials says that so long as unemployment keeps falling below the level they project is consistent with stable prices, they should raise rates to a level designed to restrict growth in order to prevent the economy from overheating. This is what the Fed has typically done in the later stages of an economic expansion.
Others have indicated they might support a relatively unusual departure from this stance. They say if inflation doesn’t appear to be accelerating beyond the Fed’s 2% target, they might want to slow or suspend rate rises earlier than would normally be the case.
Mr. Clarida’s speech didn’t explicitly embrace one approach over the other. But he identified possible reasons inflation might remain modest enough to allow this latter approach.
He said the economy’s underlying growth rate might be faster than he had thought several years ago and that the level of unemployment consistent with stable prices might be lower.
Some economists have said the recent increase in business investment has reflected spending in the energy sector. Mr. Clarida said he saw evidence that this investment upturn “is not just an ‘oil patch’ story,” which could reflect ways in which tax cuts are boosting the economy’s long-run capacity to grow.
The Fed’s No. 2 official also pointed to signs that worker output per hour is picking up, which would allow the economy to grow faster without fueling more inflation, and that more workers on the sidelines of the job market might be encouraged to return to work, which could also restrain any inflationary pressures.
“Even with today’s very low unemployment rate, the labor market might not be as tight—and inflationary pressures not as strong—as I once would have thought,” he said. “I am certainly not alone in this thinking.”
Altogether, these developments mean that customary forces in which prices rise as wages pick up may be muted. “The traditional indicators of cost-push price pressures are not flashing red right now,” he said.
Mr. Clarida said inflation data as well as market-based and survey data of businesses’ and consumers’ expectations of future inflation would weigh heavily in determining how to set the central bank’s benchmark policy rate.
If strong job and economic growth continue next year together with “a material rise in actual and expected inflation, that circumstance would indicate to me that additional” rate increases “might well be required beyond what I currently expect,” he said.
On the other hand, if strong growth continues with “stable inflation, inflation expectations and expectations for Fed policy” such a scenario “would argue against raising short-term interest rates by more than I currently expect,” Mr. Clarida said.
Write to Nick Timiraos at [email protected] and Paul Kiernan at [email protected]
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