Former Federal Reserve Vice Chair Clarida: Adjustments to the inflation target must be communicated clearly, or they will increase market uncertainty

Former Federal Reserve Vice Chair Richard Clarida stated that if the Federal Reserve adjusts its preferred inflation measure without clearly communicating its policy objectives, it could increase market uncertainty.

Previously, Federal Reserve Chair Waller indicated that the Federal Reserve would consider whether there are alternative inflation metrics to the current Core Personal Consumption Expenditures Price Index (Core PCE).

Clarida said: “They can choose to use an average indicator rather than focusing solely on one index; they can also track the CPI, PPI—there are many options.”

“A central bank that implements an inflation targeting regime must be clear about exactly which target it is tracking. This target can change, and it may evolve over time, and this is very important.”

Key Topic of Waller’s Term: Reducing Forward Guidance, Yet Markets Need More Signals

Clarida’s comments on the Federal Reserve’s communication approach touch upon the core of policy discussions since Waller succeeded Powell.

Waller hopes the Federal Reserve will reduce the use of “forward guidance” to avoid influencing markets by signaling future interest rate paths in advance. However, in the absence of clear policy signals, Wall Street has begun to interpret the Federal Reserve’s stance on its own.

For example, this Wednesday, after the Federal Reserve meeting, the market reacted to renewed inflation concerns, causing the 30-year U.S. Treasury yield to surge sharply.

Clarida said: “The market’s reaction during the press conference might not be the outcome the Federal Reserve hopes to see.”

U.S. Treasury Sell-Off Reflects Market’s Lack of Understanding of the Federal Reserve’s Reaction Function

Clarida believes that the sharp volatility in the U.S. Treasury market is related to the Federal Reserve deliberately keeping policy ambiguous.

He said that in the absence of forward guidance: “The market has to develop a broader understanding of the Federal Reserve’s reaction function.”

Previously, the Federal Reserve kept the federal funds rate unchanged in the 3.5%-3.75% target range, but three officials voted in favor of a rate hike.

Clarida Agrees with U.S. “K-Shaped Economy” View

In terms of macroeconomics, Clarida agrees with the view that the U.S. economy is exhibiting “K-shaped economy” characteristics.

He said that the divergence between the two branches of the U.S. economy has continued to widen over the past six or seven years.

Among them, about 60% of Americans own their own homes and hold stock assets, benefiting from a rising stock market and asset appreciation; while the other 40% mainly rely on renting and have relatively few equity assets, thus failing to fully share in the wealth gains from rising assets.

Clarida believes this economic divergence is becoming an important factor in understanding U.S. consumption, wealth distribution, and the transmission effects of monetary policy.