Fed official upbeat on economy, but rate hikes to be gradual

[WASHINGTON] The US economy faces fewer risks and is poised to continue to expand, but the central bank will move gradually to raise interest rates, a senior Federal Reserve official said Tuesday.

Fed Vice Chairman Richard Clarida stressed that officials will be watching for signs of inflation and developments in labour markets before making any decision to raise the benchmark lending rate.

Risks to the economy are "less skewed to the downside" and "US economic fundamentals are robust," meaning the recovery next year is likely to "become the longest US expansion in recorded history," Mr Clarida said in a speech to a conference in New York, home of the US financial markets.

The combination of upbeat analysis of the economy, with what might be viewed as a less aggressive stance on monetary policy, is likely to be cheered by markets which in the past two months have erased most if not all of the year's winnings.

In a speech in late October, Mr Clarida said that even after three increases this year the Fed's policy interest rate at 2.25 per cent was still providing stimulus to the economy.

A few weeks earlier, Fed chief Jerome Powell said the central bank still had a "long way" to go before returning to a neutral point where it was no longer juicing the economy.

But with falling share prices - markets also were spooked by the impact of President Donald Trump's trade wars - both officials have have dialed back their comments, emphasizing the need to move cautiously.

Both have also stressed that raising rates too quickly also entails risks to the economy, as much as raising too slowly risks fueling price increases.

Mr Clarida on Tuesday said the current rate level is "much closer" to neutral now, but how many more increases will be needed is a matter of judgement based on incoming economic data.

The need for new data about "unknown parameters" in the economy "supports the case for gradual policy normalization, as it will allow the Fed to accumulate more information."

The vast majority of economists still expect the Fed to increase the key policy interest rate in December, but how many moves are likely in 2019 has become more a matter for debate.

Mr Clarida stressed that policymakers will aim to keep inflation from accelerating beyond the two per cent target, while supporting full employment.

Even with unemployment at a 50-year low of 3.7 per cent, he said there could still be room for job gains, especially for "prime age" workers 25-54 years old.

AFP