A top Federal Reserve official has said the central bank could cut rates if the outlook takes an unexpected turn for the worse as he vowed to be “nimble” in ensuring the US expansion continues. 

Richard Clarida, the Fed’s vice-chairman, said policymakers judged in their latest meeting that the current level of official interest rates is appropriate at 2.25-2.5 per cent, because they expect weak inflation to be transitory.

But taking questions after a speech in New York he said the Fed was “very attuned” to the risks to the outlook and if they crystallised it could be a reason for more “accommodative” monetary policy. 

“If the incoming data were to show a persistent shortfall in inflation below our 2 per cent objective or were it to indicate that global economic and financial developments present a material downside risk to our baseline outlook, then these are developments that the committee would take into account in assessing the appropriate stance for monetary policy,” Mr Clarida said in his speech. 

The comments come following a sell-off in equity markets and surge in US government bond prices as investors become more anxious about the impact of US-China trade hostilities.

US growth remains robust, with the economy expanding at a revised annualised pace of 3.1 per cent in the first quarter, according to the latest official data, but other countries around the world have slowed and US inflation has repeatedly undershot the Fed’s 2 per cent goal despite low unemployment. 

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Mr Clarida’s willingness to discuss the possibility of rate reductions marks a change of tone from the Fed’s recent communications, where the central bank has emphasised its “patient” stance. Minutes to the Fed’s most recent rate-setting meeting did not record an explicit discussion about the possibility of lowering rates. 

However, the minutes noted that several participants commented that if consumer prices did not show signs of moving up over coming quarters, there was a risk that inflation expectations could become anchored at levels below those consistent with the committee’s 2 per cent objective.

In his remarks Mr Clarida said that longer-term inflation expectations were sitting at the low end of the range he considered to be consistent with the Fed’s price-stability mandate. 

Market and business confidence remains vulnerable to further setbacks in trade talks between the US and China. Since the Fed’s latest policy meeting on April 30 and May 1, the Trump administration has announced increases in tariffs on $200bn of Chinese imports, prompting a response by Beijing. The US has also unsettled markets with its actions against Chinese telecommunications equipment maker Huawei.

Treasury yields sank into the New York afternoon on Thursday, having earlier found some support following data that showed US growth was on a firm footing in the first quarter — before trade tensions between the US and China escalated. The benchmark 10-year Treasury yield moved two basis points lower to 2.24 per cent, in line with levels seen in September 2017. Stocks rose after midday, with the S&P 500 up 0.3 per cent. 

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Mr Clarida said the US economy remains in a “very good place”, while adding that the Fed needed to be “nimble” as it seeks to sustain the economic expansion as long as possible.

“Let me be very clear that we are 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 a more accommodative policy. That is definitely something in the risk-management area that we would think about,” he said in the question and answer session at the Economic Club of New York. 

Asked in particular about the recent inversion of the yield curve, in which yields on short-term government debt exceed longer-term yields — a move that has heralded recessions in the past — Mr Clarida did not downplay the phenomenon. “It is certainly something that is relevant as we consider appropriate policy,” he said. 

The difference between three-month and 10-year Treasury yields remained negative at minus 12 basis points on Thursday.

Via Financial Times