Fed's Clarida says distance to neutral on interest rates is "a matter of judgement"

The US central bank's second top-ranking official sounded a positive note on the outlook for the American economy and inflation, but didn't come off quite as 'dovish' as when he last spoke.

In remarks prepared for a speech at The Clearing House and The Bank Policy Institute Annual Conference in New York, Federal Reserve vice-president, Richard Clarida, said that short-term interest rates in the US were now "much closer" to their so-called 'neutral' level than when rate-setters began tightening policy in December 2015.

However, unlike on 16 November, when he made similar remarks, this time around he added that exactly "how close" they were to neutral "was a matter of judgement" and that there was "a range of views" on the Federal Open Market Committee.

Nevertheless, Clarida was upbeat on the economy, pointing out how continued growth in 2019 would push the current expansion into its 11th consecutive year, making it the longest ever in US economic history.

He also stressed the importance of keeping a close eye on inflation expectations, which according to the University of Michigan's surveys of US consumers were running at the lower end of what was compatible with price stability.

Inflation-linked US Treasury notes also appeared to be pointing to a headline rate for the personal consumption expenditures price deflator running at "somewhat less than 2.0%", he said.

Significantly, Clarida highlighted how growth in the supply side of the economy had kept-up with demand in 2018; hence the recent readings on inflation which were in-line with the Fed's price stability mandate.

And there were some signs that the rate of labour force participation would continue to increase, helping to boost supply.

But it was also necessary that business investment continues to improve, unlike in the third quarter, Clarida said.

"I believe monetary policy at this stage of the economic expansion should be aimed at sustaining growth and maximum employment at levels consistent with our inflation objective.

"At this stage of the interest rate cycle, I believe it will be especially important to monitor a wide range of data as we continually assess and calibrate whether the path for the policy rate is consistent with meeting our dual-mandate objectives on a sustained basis."