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WRAPUP 2-Darkening U.S. market outlook yet to faze patient Fed

Trevor Hunnicutt and Ann Saphir

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NEW YORK/SAN FRANCISCO, May 30 (Reuters) - Top Federal Reserve officials on Thursday showed little sign they are ready to veer from their patient stance on interest rates despite bond markets pointing to concern that the U.S.-China trade war will hurt growth.

Fed Board of Governors Vice Chair Richard Clarida, speaking before an economics group in New York, described https://www.federalreserve.gov/newsevents/speech/clarida20190530a.htm the U.S. economy as being in "a very good place" and as close to policymakers' goals as it has been in 20 years.

"The U.S. economy is in a very good place, with the unemployment rate near a 50-year low, inflationary pressures muted, expected inflation stable, and GDP growth solid and projected to remain so," he said, pointing to estimates that suggest interest rates are appropriate.

But he acknowledged two prominent risks to his sunny - and mostly unchanged - forecast that could eventually require a rate cut: signs of slowing global growth and weaker-than-expected U.S. inflation data.

"We're attuned to potential risks to the outlook and, if we saw a downside risk to the outlook, then that would be a factor that could call for more accommodative policy," Clarida said.

The Fed has kept rates on hold this year within a 2.25-2.50% range even as markets have increasingly bet that their next move may have to be a rate cut due to a U.S.-China trade skirmish and tepid inflation.

Bond yields have tumbled this week as part of a broader flight to quality by investors. Parts of the U.S. yield curve remained inverted on Thursday, with the yield on 3-month Treasury bills, at 2.37%, exceeding both the 2-year Treasury's 2.07% yield and the 10-year Treasury's 2.23%. When short-term borrowing costs run above long-term ones, it is historically a signal of a coming recession a year or two ahead.

Fed Board Vice Chair of Supervision Randal Quarles, meanwhile, delivered remarks at a conference in Washington reiterating the central bank's longstanding view that rates are not the best way to manage financial stability risks.

Even though the speech https://www.federalreserve.gov/newsevents/speech/quarles20190530a.htm did not discuss rates directly, his comments offered little support for a cut in coming months that traders of short-term interest rate futures are currently anticipating.

"Accommodative monetary policy, while necessary to support activity during the early stages of an economic expansion, may also increase vulnerabilities in the financial system, especially if maintained for too long," Quarles said.

Clarida and Quarles both have a vote on U.S. interest rates. Clarida, a well-regarded monetary economist, is seen as particularly influential.

TRADE, INFLATION

U.S. President Donald Trump said on Thursday that the United States was doing well in trade talks with China and that Beijing wanted to make a deal with Washington. But recent weeks have brought few signs of progress toward a deal that would reduce uncertainty and tariff costs that may restrain growth.

Meanwhile, inflation data has been weaker than policymakers expected. And while some softness in price increases could prove to be "transitory," current readings of inflation expectations point to them being at the "low end" of an appropriate range, Clarida said.

Inflation was much weaker than initially thought in the first quarter amid a sharp slowdown in domestic demand. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components increased at a 1.0% rate last quarter, the Commerce Department said. The so-called core PCE price index, which is the Fed's preferred inflation measure, was previously reported to have risen at 1.3% pace.

The Fed has a 2% target for inflation, which it sees as sustainable, enough to encourage growth without eroding the value of a dollar too much. (Reporting by Trevor Hunnicutt in New York and Ann Saphir in San Francisco; Additional reporting by Howard Schneider; Editing by Chizu Nomiyama)