Richard Clarida has played many roles as an economist and policy maker over the years that give him a broad perspective on where the economy and Fed have been and where they are heading now.
He was vice-chair of the Federal Reserve in the tumultuous years from 2018 to 2022. Prior to this starting in 2006 he was Global Strategic Advisor for PIMCO, the job he turned to after he left the Fed and holds to this day. He has taught at Columbia University for many years as a professor of economics and international affairs. And he served at the Treasury department as an assistant secretary for economic policy in between these many roles.
At at time when the U.S. and world are rattled by President Trump’s tariff policies, Rich says the economy and labor market are still in a good place, echoing Fed chair Jay Powell’s recent comments. Will tariffs cause inflation to rise and make it harder for the Fed to navigate policy this year and next? He sees its too early to tell but he says this could result in as much as a full percentage point rise in year-over-year inflation. But the important development for the Fed to weigh is whether or not will cause inflation expectations to rise.
So dive in and hear what Dr. Clarida has to say. He is considered the lead architect of the policy framework the Fed initiated in 2020 just as the pandemic was in full gear. He is quick to note this was a group effort by all the Fed’s policy makers. And provides a firsthand overview of how it developed, the pro’s and con’s of what the Fed did, and what some of his recommendations are now.
Uncertainty may be the new reality 00:02:54.350
The Trump. 2.0 team came in with an incredibly ambitious expansive agenda. So regarding tax policy, government spending trade policy, immigration, industrial policy, geopolitical alignment. And so I thought, and indeed wrote a piece in pimco.com a couple of weeks ago, and I think I was early, but this is more or less how it's playing out that 2025 could well be the year in which is really focused on the uncertainty about the agenda and what gets delivered 2026. We may know a lot more about trade tariffs, tax and immigration, and so you know, markets don't like uncertainty. And in particular we saw some version of this in 2019 with trade policy uncertainty. So I don't think, especially after what we heard this morning from the President about doubling down on tariffs from Canada. I don't think this uncertainty gets resolved in the near term, and so I think we need to get used to this and the market reaction.
Too many positive to raise recession risk appreciably 00:04:33.470
PIMCO NY Studio: Well in any given year. You know, economists are. There are a lot of things economists are not good at, and one of them is forecasting recessions, but in any given 12 month period there can always be some unforeseen development that triggers a recession. So economists usually think that in any given year. There's about a 1 out of 7 chance, maybe a 15% chance that you have a recession. If you had asked me this question at the beginning of the year I might have put the probability of a recession this year at 15%. Now I might be at 20, but again not particularly elevated because the economy came into the year in good shape, of full employment in the labor market, inflation falling and close, if not quite yet, to the Fed's target, you know a lot of animal spirits and optimism. And we just got some good numbers today, for example, in the jolts report. So the economy came into the year with a good head of steam, and I think it would take a lot absent some unforeseen shock to derail that.
No recession but some cleat headwinds 00:05:46.240
But I think it's clear that at minimum on the trade and immigration side in particular, I think the uncertainty will at least for some time, be a headwind to growth.
Still in a good place… 00:06:17.320
…That's certainly a term I'm familiar with <<Powell: We are in a good place>>. I think Powell and myself and other Fed officials use that terminology quite a bit. Powell's also said that not only is the economy in a good place, but coming into the year, but they judge the monetary policy is in a good place. I think that they can afford to delay making any decision on additional, or when the next rate cut is until they get a lot more data. I do think this is a fed that is not inclined, given the uncertainty, to deliver a rate cut based solely on a forecast that the economy might go south, so in some ways I think the Fed is probably somewhat less preemptive now than it has been in the past. But the other thing I found interesting, Kathleen, about the Chair's remarks at the Booth Conference. Is, he repeated again. What he said several times in press conferences, and up on Capitol Hill. that the Fed judges that the labor market is not a source of inflation pressure, and that they will be prepared to act and cut rates if they see material and sustained weakening in the labor market.
Atlanta Fed GDP Now Index Measure Still Evolving 00:07:54.890
A couple of things. 1st of all, the Atlanta fed does really good work, and they're very honest. What they put up on GDP-now is what economists call a now-casting model. So it's a statistical model with no human judgment. That's sort of the appeal. No, there's no one with a thumb on the scale. What really influenced the Atlanta Fed projection, which went from positive growth to negative growth pretty quickly, was there was a surge in imports in the 4th quarter, and arithmetically when imports go up, that in the 1st instance would depress GDP. Now, ultimately the details are important. In particular, if imports go up, but they just show up in inventories and warehouses.
Labor market wage-trends are in good shape 00:09:33.090
I think the labor market is in very good shape. You know, we did have a labor market. That was that was overheating. The unemployment rate got down to, I think, 3.4%... We had this huge gulf between vacancies and unemployment. Right now the unemployment rate is right in the range that the Fed and most forecasters think is consistent with full employment. The ratio of vacancies to unemployment is now back to levels that we saw back in 2019. And we've seen a deceleration in wage inflation. Wage inflation is running about a half a point above where it was in 2019. But importantly, productivity growth is also running about a half a point above. So if you look at so-called unit labor costs which adjust wage, inflation for productivity gains. Unit labor costs are running more or less in the ballpark of where the Fed would be comfortable. So you know, this is a good, a very good, labor market. Now, you know, we had a challenging couple of years when price increases were outpacing wage gains, and there was a lot of adjustment. But that really… that's in the rear view mirror.
Inflation is too hot but not by much 00:12:22.990
Well, you know, especially when you're a central banker. You look at everything in terms of inflation readings. I think the underlying story, looking across all the measures is one in which underlying inflation is running, probably about 2 and a half percent. The target is 2%. So there's still some ground to travel for the Fed. You know the ground to travel on that bumpy road, as <Powell> likes to say
Inflation expectations on shaky ground... 00:12:50.250
When you're looking at inflation expectations, Kathleen, as you know, you and I have talked about this over the years, it's very important to distinguish the horizon over which you're measuring expectations. What is true? And we have even seen this in the financial market measures in the Tips, market Inflation index market. What is true is that as people began to factor in the trump victory that near term inflation, expectations, say, over the next year or 2 did move up in ways that were consistent with folks pricing in some tariff pass through to the price index, but longer term measures, say 5 to 10 years in the future did not move up as much, and those have begun to come down. Now, what was so noteworthy about the Michigan number that we got several weeks ago is not only the short-term inflation, expectation, number moved up, but the longer term 5 to 10 year number moved up, I think, to the highest print. In 35 years, I was on live television. When that number came out the anchor asked me what I thought about it, and I said, not good… asked me what the Fed would think about it, and I said, Well, maybe there's 1 month they'll look through, but if we get 3 or 4 of these it will not be good. So, yes. Now, one thing unfortunate about Michigan, I think it is. And I said this as a Fed official, I think it is the gold standard of consumer surveys.
Polarized inflation expectations 00:14:24.850
PIMCO NY Studio: One thing you're seeing in the Michigan data now is that it reflects the polarization in our society. So if you ask Democrats about inflation expectations, they've skyrocketed. If you ask Republicans about inflation expectations, they've actually fell. And then Independents are sort of somewhere in the in the middle. And we're seeing that in some other economic data as well. I'm not saying that we should ignore it on that basis. In fact. I would be inclined not to ignore it.
Fed needs to be on alert for inflation 00:15:04.850
I think there is another issue. I'll just be candid with you is we're we're in a much more connected world than we were when you and I started our careers. And you know, memes and themes can start to take a life of their own, especially in Twitter or X or other social networking platforms. And so certainly, you know, if I were still an official, especially given the history of the last several years, when inflation surged in 2021, and the fed initially misdiagnosed it as a transitory, and I should confess I was a charter member of team transitory. So I'm certainly aware of that. And I think, given that history, and Jay Powell has said this to his credit, you know, given that history. it will be important for the fed to be attuned and attentive to measures of inflation expectations, especially once we start to get the tariffs, because if public expectations of inflation ratchet up over, especially over longer horizons. as a result of tariffs, you know. That would be something that would be a problem for the fed.
Former Fed analysis saw tariffs as an inflation risk factor 00:16:34.170
So the you know, the textbook analysis, and indeed, we now have access to the Fed staff briefings with a 5 year lag. So you can. Folks can actually read the staff briefings to the fed when I was there in 2018 about tariffs, and that's more or less where it landed, which is that broad-based tariffs will likely push up the price of imports, and thus the price level and depending on how broad based the tariffs are, and how high the tariff rates are, it could push up the price level by one percentage point. In other words, in a year where inflation might have been running at 2.2%. It could be running at 3.1% or 3.2% in some cases. And so the real question for policy, if we see, that is, whether or not the fed is concerned, that those price increases, will begin to then seep into longer term inflation expectations. And I think it's just too soon to tell. You know, the circumstances that prevailed during Trump 1.0 when I was vice chair were were similar in that we had a trade war and tariffs in particular, with China. But the inflation situation was much different. In fact, in 2019, inflation was falling.
“Last time’ despite Trump tariffs inflation fell 00:17:56.520
In fact, in December of 2018, I sort of remember this well since I was there December 2018 was the last rate hike in that cycle inflation was running right at 2%, and labor market was in good shape. And then, in the next 6 months of 2019, inflation was falling and the economy was slowing. And so it was a pretty straightforward call, you know, not without some controversy, but a pretty straightforward call to adjust rates lower
But different conditions exist now, but inflation will fall 00:18:24.580
The initial conditions are different. Inflation is above target. Now, it's likely, at least on a 12-month basis, to continue to decline, and so at least I think through probably may, or maybe even June. regardless of tariffs. The inflation numbers are going to be declining for the next several months. But of course, monetary policy needs to make decisions about the outlook for the future, and you know, and depending on the details that could factor into to rate decisions.
Will tariffs hurt growth? 00:19:04.044
In the short run. Almost certainly. We're in a world in which most international trade is not final consumption goods. But it's either capital goods or intermediate inputs. And so a tariff is a tax on an input to the production process. A lot of tariffs are either capital goods or components for capital goods. So if you make machines more expensive, you buy fewer of them, and so there will be some effective tariffs on growth again, a lot of other moving parts. Some of the tariffs may be absorbed in foreign exporter profit margins, the dollar can adjust, and we've seen in particular, a big dollar adjustment versus Mexico and Canada, so it's not likely to be one for one. But the direction of travel is pretty clear, at least for some time. You know, tariffs would dampen economic activity.
Looking back at the ‘New Framework 00:20:41.210
Well, it was very much a committee effort, and so I did have responsibility for sort of coordinating the process, the system-wide effort. But in the end. All night. Just then we had 17 members of the committee, some vacancies, all 17 member, all 17 participants, supported the refinement to the framework. So the way I think about the 2020 framework, is it really codified the way the fed had been operating for for some time, and in particular, it was really more of an evolution than a revolution. We were in a period that the era of secular stagnation, when rates were low globally, when there's pessimism about growth, and central banks were rightly concerned about running out of ammunition to support the economy given that they didn't have a lot of room to cut rates. We saw experience in the eurozone in Japan, in which decades of low inflation had led to a decline in inflation expectations. So what we basically said in the new framework is that when we've been going through a period in which inflation has been too low and we've been constrained at the Zero bound that we will run a monetary policy in which, at least for some time, inflation would be allowed to moderately overshoot the 2% target. That is, we wanted to reinforce the idea that 2% was not a ceiling from below. We also wanted to emphasize that there was a lot of uncertainty about our understanding of the dynamics of the labor market and full employment, and we wanted to clarify that the PAL, fed at least in 2020, was not prepared to raise rates and throw people out of work solely because a fed model said the unemployment rate was too low and too many people were working.
Adopted a data-centric approach 00:22:16.200
What we said is that we would like to see their indications of price pressure before we raise rates, not mechanically raise rates because the unemployment rates too low. And, to give you a concrete example. you know, when the Fed's original framework was initially agreed to in January of 2012, under the leadership of then Vice Chair, Yellen and Ben Bernanke. You know the Fed staff thought that the level of unemployment, consistent with full employment, was around 5 and a half or 6%.
Eager to see new ‘New’ framework 00:23:49.920
We may be in a world, and there we may be in a world, We're certainly in a world today, and we may be in a world over the next 5 years… in which the zero bound and low rates are not a constraint on policy, in which case the old, the framework we adopted in 2020 said, then we just run monetary policy the way we always have. And so I think those elements, I think, continue to hold up well, and I'll be eager to see, of course, where the where the committee lands.
Inflation lessons learned: Supply shock and more 00:25:27.890
I think, to me the lesson. 1st of all, the over, the surge in inflation was a global phenomenon, the initial exogenous shock that triggered it was the pandemic and the shutdowns. That, then that then. motivated a very, very robust monetary policy response and fiscal policy response, especially in the in the Us. One of the problems I've had Kathleen at least a couple of years ago, with a lot of the commentary online about the cause of the great inflation surge in 2021 and 2 is that folks, including people who I know and respect, felt compelled to allocate 100% of the inflation to fiscal or 100% to the fed or 100% to covid. And the reality is all of the above. It was a huge supply shock. We literally shut down the global economy or big chunks of it for a year.
Re-opening the economy as expensive 00:26:22.810
PIMCO NY Studio: There was a demand response to that both fiscal and monetary. And then there was a substantial adjustment cost to reopening the global economy. Indeed, I said as a fed official, and in some remarks that it's turned out to be a lot more expensive and time consuming to reopen the global economy than it was to shut it down.
More lessons: forward guidance 00:26:47.380
I think there's several lessons learned. The 1st is that there are costs as well as benefits to fed forward guidance on the path for rates. The fed gave some very muscular forward guidance. In September of 2020 it said it wouldn't raise rates until inflation got to 2, and until the labor market got to full employment that was a choice the fed made. It was not required by the new framework. Indeed, 2 members of the committee who had supported the new framework voted against that September of 2020 communication, because they felt that it went further than we needed to go. I think that there are costs as well as benefits to giving to giving forward guidance in particular. The guidance that we offered on QE. The fed could have said, Look, you know, we'll let you know at the next meeting if we're going to keep the Qe program going.
A reasonable counter factual 00:28:00.560
…one would have been, what would a traditional? You and I used to go and still go to the Hoover conferences in May every year, you know one of the things the fed could have done is just to say, look, forget the new framework. We're just going to follow a Taylor rule. And what the Taylor rule analysis shows, including the excellent work by David Papel at University of Houston. is that if the Fed had just lifted off, according to a Taylor rule would have probably lifted off at the September 2021 meeting. In the event it lifted off in March of 2022. So essentially, you're talking about? What would history have looked like with Liftoff in September of 21 versus March of 22. The other counterfactual is, what did other inflation targeting. Central banks do that didn't have a refined framework, and what we know is every central bank in the world, at least among the advanced economies delayed hiking rates until inflation moved above target and most of them delayed hiking rates until core inflation moved above target. So I really don't think this episode provides a lot of lessons about the framework. I think it provides lessons about the way central banks can and do communicate in ways that are robust against possible different developments.
Counterfactuals are not that critical in the end 00:29:18.100
David Reifschneider, who was a very, very influential Fed Staffer and is now doing other things, did a piece about a year ago, where he formally did all the counterfactual exercises, so forget the new framework, lift off with the Taylor rule, and what he found, Kathleen was the following. that if you had just lifted off with a Tailor-type rule, then inflation in 2021 would have been more or less what it actually was, because the liftoff would have been late in the year. the peak in inflation might have been about a point and a half lower, so instead of PCE peaking at 7%, it might have peaked at 6%, but the but the unemployment rate would have been 3 percentage points higher. And so the real question is, you could not have avoided the inflation with an alternative approach. You might have limited the increase to 6%, not to up to 7%, but you would have had a much softer labor market. So my bottom line is, I think there are lessons learned, and my understanding from what the Fed has said is a lot of the focus in this review will be on communication, and I think that is, I think that's a good approach.
Targeted inflation should not be a ceiling 00:31:13.410
The real question is, do central banks want to communicate that good policy will always prevent inflation from exceeding 2%. And I think the answer is, no. How that is communicated is certainly something that is worthy of discussion. But we have ample evidence.
A very concrete example, Kathleen, is the fact that the Bernanke fed in December of 2012, operating under the then inflation targeting regime, put in the FOMC statement a version of the so-called Evans rule which said. You know, we're not going to think about hiking rates so long as inflation is projected to be under 2 and a half percent. And so overshooting can be part of the toolkit. And so I wouldn't want to say you never want policy to rule out the overshoot. I think communication is key with regards to the labor market.
Benefits of running ‘hot’ 00:32:10.820
As I said, the main implication of what the Fed did in 2020was essentially to codify that it would not hike rates solely because too many people were working. There are benefits, ample benefits, and have been demonstrated in a lot of research than in the typical business cycle. The improvements in standards of living and in employment security are not evenly distributed through the cycle. and the longer you can keep the economy at full employment, the better it is for workers, and particularly less educated workers or workers in lower rungs of the income distribution. And so this was essentially saying, there's a
Framework statement holds up well 00:32:49.320
Congress gives the fed the goal of maximum employment, and the framework statement said a benefit of getting to, and sustaining maximum employment, are the benefits that accrue more broadly in the society. And so again, I think the Fed could well, as I did as vice chair. I think in 9 or 10 speeches clarify. You know what that means. I should also mention, Kathleen, that you know, at least within the fed. The consensus statement that the Bernanke Yellen fed, rolled out in January of 2012, and that every fed since then has either reaffirmed or refined within the fed system. A couple of my colleagues said to me, they said, Richard, you have to understand within the fed. This is a quasi-constitutional document. This is very big picture about goals and aspirations. The details of policy, communication, execution are really reserved for the FOMC statements. And so I think in that context, I think it holds up, holds up pretty well.
The ‘dots’ communication and use of scenarios 00:34:20.949
Well,I had a I had a love hate relationship with the dots. I did conclude that having the dots is better than having Zero communication about the rate path. Are there ways to have better communication about the rate paths, you know? Certainly. And my understanding? In fact, it's been the public program now, for the Fed’s Conference in May is going to have some remarks from Ben Bernanke, who is, I'm sure you know. Kathleen did a deep dive into Bank of England communication a while back, and Ben concluded that the Bank of England would be better served to de-emphasize the baseline or central forecast, and spend more time communicating about scenarios, and I wouldn't be surprised if Ben makes a similar recommendation when he speaks at the fed Conference, and I think that would be a I think that would be a big improvement, and other suggestions have been the Fed staff publishing its forecast or having the Sep projections show a range of path for the policy rate based upon a range of macro scenarios. And so I think those could all be good. Those could all be good steps, but sort of in the sort of extreme case. Would I just get rid of the dots and replace them with nothing? The answer would. The answer would be, No.
Richard H. Clarida
Richard H. Clarida began a four-year term as vice chairman of the Board of Governors of the Federal Reserve System in September 2018 and took office as a Board member to fill an unexpired term ending January 31, 2022. He resigned on January 14, 2022.
Clarida earned a bachelor's degree in economics from the University of Illinois at Urbana in 1979. He obtained his master's degree and doctorate in economics from Harvard University in 1983.
Prior to his appointment to the Board of Governors, Clarida served as the C. Lowell Harriss Professor of Economics and International and Public Affairs at Columbia University, where he taught from 1988 to 2018. From 1997 until 2001, Clarida served as chairman of the university's economics department. In addition to his academic experience, Clarida served as assistant secretary of the U.S. Treasury for economic policy from February 2002 to May 2003. In that position, he served as chief economic adviser to Treasury Secretaries Paul O'Neill and John Snow and was awarded the Treasury Medal in recognition of his service. Clarida also served as a senior staff economist on the Council of Economic Advisers under President Reagan. From 2006 to 2018, Clarida served as global strategic advisor with PIMCO. He was promoted to managing director in 2015.
Clarida is a member of the Council on Foreign Relations. He was a member of the National Bureau of Economic Research (NBER) from 1983 to 2018 and served as coeditor of the NBER International Macroeconomics Annual from 2004 to 2018.
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