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Clarida Says Fed Policy Will Take Account of Downside Risks

Rich Miller and Craig Torres
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Fed Policy Makers Sound Open to Trimming Interest Rates Again

(Bloomberg) -- The Federal Reserve will take account of the ongoing risks to the favorable outlook for the U.S. economy in deciding the stance of monetary policy in the coming months, Vice Chairman Richard Clarida said.

“The economy is in a good place but in the 11th year of an expansion there are also some risks,” he told CNBC television in an interview on Friday.

He highlighted, in particular, a slowing global economy.

“In terms of global growth it is getting worse. In terms of global trade and global investment it has been pretty soft for a while now,” he said.

A divided Fed cut interest rates for the second time in two months on Wednesday, trimming its federal funds target by a quarter percentage point to a range of 1.75% to 2%. Three regional Fed presidents dissented from the decision, with two wanting no change and another backing a half-point reduction.

Fed Chairman Jerome Powell told reporters following the decision that the central bank cut rates to shelter the economy from weak global growth and trade-policy uncertainty amid muted inflation pressures.

Outlook Risks

Clarida said policy makers agree that the economy is in good shape but differ in their assessments of the risks to the outlook.

Two of the three policy makers who voted against the quarter point rate cut explained their reasoning on Friday.

St. Louis Fed President James Bullard said in a statement that he favored a half-point reduction to “provide insurance against further declines in expected inflation and a slowing economy.”

Boston Fed President Eric Rosengren said separately that he opposed reducing rates because easier monetary policy “risks further inflating the prices of risky assets and encouraging households and firms to take on too much leverage.”

Asked about Rosengren’s concerns, Clarida said the Federal Open Market Committee as a whole doesn’t consider financial stability risks to be elevated.

The Fed vice chairman extolled the performance of the U.S. economy, calling it the “star pupil” in the world.

“I cannot think of a time when in the aggregate the consumer has been in better shape,” Clarida said.

The savings rate and household net worth are high while wages are going up. “We are in a virtuous circle with the consumer,” he said.

“The U.S. economy is a resilient economy, ” he said. “But we don’t take it for granted.”

“That’s why the risk management approach that Chair Powell outlined is the appropriate place to be right now,” he added.

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--With assistance from Vince Golle.

To contact the reporters on this story: Rich Miller in Washington at rmiller28@bloomberg.net;Craig Torres in Washington at ctorres3@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alister Bull, Scott Lanman

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