Top Fed official: Raising rates on inflation fears alone ‘hard to justify’

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A top Federal Reserve official suggested Monday that the central bank would likely not raise interest rates without seeing substantial increases in prices for consumer goods.

Fed Vice Chairman Richard Clarida said in a Monday speech that raising interest rates to slow down potential increases in inflation is “difficult to justify” given how much it could restrain job growth in the process.

“Econometric models of maximum employment, while essential inputs to monetary policy, can be and have been wrong,” Clarida said Monday, according to prepared remarks.

Clarida continued, saying that hiking rates because inflation is projected to increase at a dangerous rate without seeing proof that it actually is could cause a “significant cost to the economy if the model turns out to be wrong.”

Clarida’s comments come days after the Fed formally adopted a new approach to interest rates meant to prevent inflation from falling to dangerously low levels and maximize job gains in times of economic growth.

The Fed is obligated by federal law to keep the unemployment rate as low as possible while keeping prices stable. The bank seeks to uphold that balance, known as the “dual mandate,” primarily by raising or lowering its baseline interest rate range. Raising interest rates is meant to increase the cost of borrowing and slow the pace of growth, while lowering interest rates is meant to make loans cheaper and boost the economy.

The Fed acknowledged Thursday that the central bank had previously been too quick to raise the rates during the recovery from the Great Recession over fears that the unemployment rate had fallen to a level deemed too low to be stable. But the steady decline of the unemployment rate through 2018 and 2019 to a 50-year low had a minimal impact on inflation, which had remained below the Fed’s 2 percent target.

The Fed’s new approach calls for seeking an average of 2 percent inflation annually and allowing inflation to run higher than 2 percent to make up for lost wage gains that often come with price increases.

“This change conveys our judgment that a low unemployment rate by itself, in the absence of evidence that price inflation is running or is likely to run persistently above mandate-consistent levels or pressing financial stability concerns, will not, under our new framework, be a sufficient trigger for policy actions,” Clarida said.

Tags Federal Reserve Inflation Interest rate Monetary policy
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