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Fed in Good Place and Higher Inflation Welcome, Officials Say

Craig Torres and Steve Matthews

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Federal Reserve policy is appropriate amid solid U.S. economic growth but there is a risk that inflation continues to fall short of the central bank’s 2% target, officials said.

“Monetary policy is in a good place and should continue to support sustained growth,” Vice Chairman Richard Clarida told the Council on Foreign Relations in New York on Thursday. “As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate.”

Fed officials left interest rates unchanged in a range of 1.5% to 1.75% at their final meeting of 2019. They also signaled policy would be on hold through 2020, keeping the central bank on the sidelines during a U.S. presidential election year. Investors see almost no chance of a rate cut in the next six months, according to pricing in federal funds futures contracts.

The Fed’s baseline view is that core inflation rises back to the central bank’s 2% target following three interest-rate cuts in 2019, which Clarida said were put in place partly to offset surprisingly strong global disinflationary headwinds.

U.S. central bankers forecast last month that inflation minus food and energy would rise to 2% in 2021. That measure stood at 1.6% in November.

“If there is a risk to that outlook, it is skewed to the downside,” Clarida said. “We need to be nimble and we need to be alert not only to U.S. but global circumstances.”

While policy is “in a good place,” he said that “if developments emerge that, in the future, trigger a material reassessment of our outlook, we will respond accordingly.”

His remarks on downside risks to inflation, however, suggest that the committee is giving that indicator some weight as it assesses the need to change policy in the future.

Global Disinflation

Clarida suggested the committee wants to give the rate cuts time to work through to inflation expectations and actual prices.

“The global disinflationary pressures which I referred to are very powerful forces and policy needs to factor that in, in setting policy to get inflation up to the objective,” he said in the question and answer period. Even so, “we do think that policy is appropriate, and, under our baseline outlook, will continue to be appropriate.”

Minutes of the Dec. 10-11 meeting released Jan. 3 showed officials still see some downside risks to their outlook for continued growth and were prepared to move rates up or down if there was a “material” change in their forecasts. “There are some indications that headwinds to global growth may be beginning to abate,” Clarida said.

The release of the minutes last week coincided with news of a U.S. air strike that killed a top Iranian general.

Oil prices rose in anticipation of retaliation by Tehran but have since fallen back, reassured by the restraint shown so far by both sides. President Donald Trump said Wednesday that Iran was “standing down” from the confrontation.

St. Louis Fed President James Bullard, speaking later on Thursday in Madison, Wisconsin, played down the risks to the U.S. economy from geopolitical tensions. He said the growth of U.S. energy production may have made oil shocks “neutral on net” for the country while the Fed has a “reasonable chance of achieving a soft landing” this year.

Bullard also said he would welcome inflation running above 2%, after running to low for most of the last seven years.

“At this point I think it would be a welcome development, even if it pushed inflation above target for a time. I think that would be welcome, so bring it on.”

--With assistance from Donald Moore and Christopher Condon.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net;Steve Matthews in Madison, Wisconsin at smatthews@bloomberg.net

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

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