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Global Perspectives: Richard Clarida on U.S. Monetary Policy

Mark Wynne

March 07, 2019

The Federal Reserve Bank of Dallas hosted Richard Clarida, vice chair of the Board of Governors of the Federal Reserve System, as part of the Dallas Fed’s Global Perspectives speaker series last month.  Clarida, previously a professor of economics at Columbia University in New York, assumed his post as vice chair on Sept. 17, 2018. While at Columbia, he wrote extensively about monetary policy, interest rates and capital flows.

The Global Perspectives series was launched at the beginning of 2016 with the objective of bringing leaders from the worlds of business, academia and policymaking to the Dallas Fed to share their insights on global, national and regional developments.

At the event last month, Clarida and Dallas Fed President Rob Kaplan discussed a range of topics that included the challenges facing monetary policymakers, the U.S. fiscal situation and the global role of the dollar. The following are excerpts from their conversation, edited for clarity, and presented by topic. 

Global Effects of U.S. Monetary Policy

Clarida: Our mandate is [maximum] U.S. employment and [stable] U.S. inflation. So, ultimately, anything that we need to do should be aimed at helping us achieve and sustain those two key outcomes.

That being said, the U.S. is part of the global economy and so, it (the global economy) does need to be factored in. I actually believe that [previous Fed] Chair [Janet] Yellen gave a couple of excellent speeches on this during her time as chair, which very much reflect the current thinking as well.

There are a couple of areas where international factors come in. Obviously, causality and flows can go both ways. So, we have to take into account when an event in the rest of the world affects our economy through some combination of an impact on financial markets, perhaps through risk appetite, volatility, interest rates or exchange rates. That’s an input to what we do.

We also understand that when we implement policy, through its impact on our growth rates and nonfinancial markets, it will have effects on other economies. Historically, our analysis shows that there’s been a net benefit to the rest of the world from our policies. To the extent that our policies can pull us away from higher unemployment rates to lower unemployment rates and toward price stability, there’s a net positive to the global economy, even accounting for the spillovers. 

The U.S. Fiscal Situation

Clarida: This is not just a factor in the U.S. We’ve had a big increase in debt across the world in the decades since the [2007–08] financial crisis. I don’t think there’s any real disagreement that the U.S. is not on a sustainable long-run, fiscal trajectory.

Ultimately, that’s going to be a decision for Congress and our president to make those two lines [tax revenues and expenditures] cross in a sustainable way. In terms of what we do at the Fed, we’re essentially taking that as an input into the calculations we need to make in terms of where the economy is heading.

One thing I would say about this is that for a particular set of reasons after the global financial crisis, we’ve had this big increase in debt and at the same time, we’ve had a decline in interest rates. So some of the typical factors that would perhaps lead to an adjustment have not led to that adjustment thus far.

Fed Independence

Clarida: Fed independence is important in the sense that we need to have operational or instrument independence to select our instruments to achieve our goals. But independence does not mean that we’re devoid or should be devoid of accountability. We have accountability in terms of Congress, in terms of the American people and in terms of achieving the goals. And so when we say we’re independent, we just need independence to do our jobs. But ultimately, we need to be evaluated and accountable in terms of meeting those objectives.

Fed Policy and Data Dependence

Clarida: I think there are several different ways in which we are and we should be data dependent. Congress has given us a dual-mandate objective: full employment and price stability. So, at minimum, we’ve got to be looking at data on employment and price stability since that’s what we’re charged with achieving.

On a second level, the economy is a complex organism, much more complex than any theoretical model. I think we need to be looking at data to tell us something and help us learn about some of the key parameters of the economy—such as, what is full employment, what is the neutral or long-run interest rate? It is assumed that you know what those are, but in the real world, you’re learning about them.

And then, thirdly, you have to recognize that there are different sources of data to learn about. You can look at financial data. You can do surveys, and those are all relevant. I think it is important to look at financial market data. You can’t be handcuffed to it. There’s a lot of noise, but there is some signal on financial market data, and I think that needs to be an important input into what we do.

About the Author

Mark A. Wynne

Wynne is vice president and associate director of research in the Research Department at the Federal Reserve Bank of Dallas.

The views expressed are those of the author and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

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