Economics
Former Fed Vice Chair Clarida sees possibility of fewer rate cuts than expected this year
Stubbornly high inflation could push the Federal Reserve into a more cautious stance this year regarding interest rate cuts, the central bank’s former vice chair said Friday.
Richard Clarida, who served as Fed governor until January 2022 and is now a global economic advisor at asset management giant Pimco, said his former colleagues need to be on guard against sticky prices that could thwart plans to ease monetary policy this year.
At its meeting earlier this week, the rate-setting Federal Open Market Committee indicated it would likely decrease rates three times this year, assuming quarter percentage point intervals. Chair Jerome Powell said receding inflation and a strong economy give policymakers room to cut.
“This may be more of a hope than a forecast,” Clarida said during an interview on CNBC’s “Squawk Box.” “I do hope that the Fed really moves into data-dependent mode, because there can be a very good case if inflation is sticky and stubborn that they shouldn’t deliver three cuts this year.”
Markets also are expecting three cuts this year, though that pricing has been scaled back after data to start the year showed inflation higher than expected.
Fed officials are banking that elevated shelter inflation is on its way down, paving the way to lower their key borrowing rate from its highest level in more than 23 years. Clarida, however, said the extent to which the Fed can cut is unclear.
“Under a pretty broad range of scenarios, they’re going to get at least one cut in this year,” he said.
However, the calculus gets different as inflation data provides mixed signals.
The Fed prefers the Commerce Department’s measure of personal consumption expenditures prices, with a particular focus on the core reading that excludes food and energy. The headline 12-month PCE reading for January was 2.4% and core was at 2.8% — both above the Fed’s 2% goal but headed in the right direction.
However, the more commonly followed consumer price index in February was at 3.2% for headline and 3.8% for core, both well above the central bank target. Moreover, the Atlanta Fed’s measure of “sticky” inflation was at 4.4% on a 12-month basis and even higher, at 5%, on a three-month annualized basis, which marked the highest since April 2023.
“If the Fed were targeting CPI right now, we wouldn’t even be discussing rate cuts,” Clarida said.
He also noted that even though Powell on Wednesday said financial conditions are tight, they in fact are “a lot easier than they were in November.” A Chicago Fed measure of financial conditions is at its loosest since January 2022.
“What I think is going on here is a delicate balance that [Powell is] trying to navigate,” Clarida said. “Financial conditions will very naturally start to ease when they get the sense the Fed is done and [will start] cutting. Then of course that improves the economic outlook and potentially makes it harder to get inflation down to 2” percent.
Inflation barely budged in April as tariffs President Donald Trump implemented in the early part of the month had yet to show up in consumer prices, the Commerce Department reported Friday.
The personal consumption expenditures price index, the Federal Reserve’s key inflation measure, increased just 0.1% for the month, putting the annual inflation rate at 2.1%. The monthly reading was in line with the Dow Jones consensus forecast while the annual level was 0.1 percentage point lower.
Excluding food and energy, the core reading that tends to get even greater focus from Fed policymakers showed readings of 0.1% and 2.5%, against respective estimates of 0.1% and 2.6%.
Consumer spending, though, slowed sharply for the month, posting just a 0.2% increase, in line with the consensus but slower than the 0.7% rate in March. A more cautious consumer mood also was reflected in the personal savings rate, which jumped to 4.9%, up from 0.6 percentage point in March to the highest level in nearly a year.
Personal income surged 0.8%, a slight increase from the prior month but well ahead of the forecast for 0.3%.
Markets showed little reaction to the news, with stock futures continuing to point lower and Treasury yields mixed.
People shop at a grocery store in Brooklyn on May 13, 2025 in New York City.
Spencer Platt | Getty Images
Trump has been pushing the Fed to lower its key interest rate as inflation has continued to gravitate back to the central bank’s 2% target. However, policymakers have been hesitant to move as they await the longer-term impacts of the president’s trade policy.
On Thursday, Trump and Fed Chair Jerome Powell held their first face-to-face meeting since the president started his second term. However, a Fed statement indicated the future path of monetary policy was not discussed and stressed that decisions would be made free of political considerations.
Trump slapped across-the-board 10% duties on all U.S. imports, part of an effort to even out a trading landscape in which the U.S. ran a record $140.5 billion deficit in March. In addition to the general tariffs, Trump launched selective reciprocal tariffs much higher than the 10% general charge.
Since then, though, Trump has backed off the more severe tariffs in favor of a 90-day negotiating period with the affected countries. Earlier this week, an international court struck down the tariffs, saying Trump exceeded his authority and didn’t prove that national security was threatened by the trade issues.
Then in the latest installment of the drama, an appeals court allowed a White House effort for a temporary stay of the order from the U.S. Court of International Trade.
Economists worry that tariffs could spark another round of inflation, though the historical record shows that their impact is often minimal.
At their policy meeting earlier this month, Fed officials also expressed worry about potential tariff inflation, particularly at a time when concerns are rising about the labor market. Higher prices and slower economic growth can yield stagflation, a phenomenon the U.S. hasn’t seen since the early 1980s.
Apple’s China rival Xiaomi still has major upside, analysts say
Social Security checks may be smaller for some as garnishments begin
Why stricter voting laws no longer help Republicans
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
The Essential Practice of Bank and Credit Card Statement Reconciliation
Are American progressives making themselves sad?
-
Accounting1 week agoHouse tax bill includes provision eliminating PCAOB
-
Personal Finance1 week agoWhat House Republican ‘big beautiful’ budget bill means for your money
-
Accounting1 week agoTrump tax bill faces Senate’s arcane rules, desire for changes
-
Finance1 week agoPersonal finance app Monarch raises $75 million
-
Economics1 week agoHow much worse could America’s measles outbreak get?
-
Economics1 week agoA court resurrects the United States Institute of Peace
-
Personal Finance1 week agoHouse Republican bill boosts maximum child tax credit to $2,500
-
Personal Finance1 week agoHow appealing property taxes can benefit new homeowners