Federal Reserve

Fed's Clarida says central bank getting closer to neutral and should be 'data dependent' on more hikes

Key Points
  • Federal Reserve Vice Chairman Richard Clarida said the central bank's benchmark short-term rate is getting closer to a "neutral" level.
  • The distinction is important for the Fed as it moves to a policy that is neither restrictive nor stimulative.
  • In a CNBC interview, Clarida also said the U.S. economy is in good shape though pockets of the world are "slowing."
Fed’s Richard Clarida defends central bank’s pace of interest rate hikes

The Federal Reserve is close to the point of being "neutral" on interest rates and should predicate further increases on economic data, the central bank's vice chairman said Friday.

Recent appointee Richard Clarida told CNBC's Steve Liesman that nearly three years of increases have brought the Fed's short-term interest rate near where it is neither restrictive nor stimulative, a key consideration when considering the future path of monetary policy.

"As you move in the range of policy that by some estimates is close to neutral, then with the economy doing well it's appropriate to sort of shift the emphasis toward being more data dependent," Clarida said during a "Squawk Box" interview, his first public comments since being confirmed in September.

He spoke at a time when the markets are watching Fed speakers closely for what happens next with rates. Fed Chairman Jerome Powell helped stoke market volatility in mid-October when he said the central bank remains "a long way" from neutral, an indication that it would be more aggressive with policy than investors had anticipated.

With his comments Friday, Clarida becomes the second central banker in as many days to suggest that neutral isn't so far away. Atlanta Fed President Raphael Bostic, in a speech delivered in Barcelona, said Thursday that the federal funds rate is "not too far" from neutral.

Clarida's remarks "continued the process of softening the Fed's message, emphasizing the need for the Fed to be data-dependent as interest rates move close to the lower end of the range of estimates for the neutral rate," Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a note.

Clarida noted that the most recent projections from Federal Open Market Committee members indicate that the long-run funds rate projection is 3 percent. The current funds rate target range is 2 percent to 2.25 percent, with markets widely expecting the FOMC to approve another quarter-point increase in December.

"I think being at neutral would make sense," he said.

In the October interview with PBS, Powell said the Fed may actually want to go past neutral if it sees a need to stop the economy from overheating.

While Powell's comments helped rankle markets, Clarida said "there is no clear signal" from the markets about the direction of the economy. He also defended the Fed's actions from criticism that it is moving too quickly with rates and could harm the momentum seen over the past two years.

"The Fed began hiking rates almost three years ago, and so it's been a very gradual cycle," he said. "The economy this year is growing north of 3 percent, unemployment' s at a 50-year low almost, and so I think also right now the policy that we set, the federal funds rate, is just barely above the rate of inflation for the first time in a decade. So I wouldn't agree with that."

While he said the U.S. economy continues to grow, he did not a slowdown globally that could factor into the Fed's decision-making.

"The economy this year as I said is going to be growing at a pace we haven't seen in a decade. Going forward, you have to look at a lot of trends, including the global economy ... Some of it is slowing," Clarida said. "Broadly, we're going to set a policy that will help us achieve the mandate given to us by Congress."

"At least from my perspective, we're at a point now where we need to be especially data-dependent," he added.