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Fed’s Clarida says rate cuts were ‘well timed,’ policy likely to remain appropriate

NEW YORK (Reuters) – Federal Reserve Vice Chairman Richard Clarida laid out an optimistic outlook for the U.S. economy in 2020 on Thursday, saying that last year’s rate cuts were “well timed” and that monetary policy is well positioned for the new year.

Although the unemployment rate is at a 50-year low, the strong labor market is not yet creating pressure for inflation, which he expects to “gradually” approach the Fed’s 2% symmetric target, Clarida said in New York on Thursday.

“I believe that monetary policy is in a good place and should continue to support sustained growth, a strong labor market, and inflation running close to our symmetric 2 percent objective,” Clarida said. “As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate.”

Clarida repeated the often-used phrase that policy is not on a pre-set course and that officials will change course if something happens to “trigger a material reassessment” of the economic outlook.

On inflation, the senior Fed official stressed that the central bank’s 2% target is “not a ceiling” and that the greater risks with inflation are skewed to the downside.

Clarida said the Fed may begin to reduce the size of its repo operations after January as it grows the overall level of reserves. He said officials will discuss that strategy during the next policy meeting, which is scheduled for the end of the month.

Some repo operations may be needed at least through April, when tax payments could drain the level of reserves, Clarida said.

The Fed has been intervening in the overnight lending markets for cash since mid-September, when a shortage of reserves caused a spike in borrowing rates. In October, the central bank began purchasing $60 billion a month in Treasury bills to permanently grow the balance sheet and increase the level of reserves. Clarida said those efforts are working, and stressed that officials are open to adjusting their plan as needed.

“As we enter 2020, let me emphasize that we stand ready to adjust the details of this program as appropriate and in line with our goal, which is to keep the federal funds rate in the target range desired,” Clarida said during his speech. He added later that the Fed’s goal is not to target the repo rate.

(Reporting by Jonnelle Marte; Editing by Chizu Nomiyama)