Federal Reserve Vice Chairman Richard Clarida disputed suggestions that the central bank suffers from a “hall of mirrors” problem under which it slavishly follows financial-market expectations for monetary policy.
“In my experience this affliction is one the Federal Reserve guards against and does not suffer from,” he said in a speech to be delivered Friday to a monetary policy forum in New York.
As the Fed reduced rates last year, some economists questioned whether such action was necessary given the health of the economy and warned of the risks of the central bank simply deferring to market wishes for a cut.
Former Fed Chairman Ben Bernanke flagged the hall of mirrors problem in a 2014 speech in which he cautioned against just that sort of an approach. “Such a strategy quickly degenerates into a hall of mirrors,” he said.
In his speech to the University of Chicago-sponsored conference, Clarida said he places at least as much weight on surveys of Fed watchers as price signals from the market in trying to determine expectations for policy.
That echoed comments he made on Thursday in a CNBC television interview in which he took issue with suggestions that investors expect the central bank to cut interest rates in the middle of this year.
While trading in federal funds futures imply a reduction, Clarida said that such readings are affected by technical factors and noted that separate surveys of Fed watchers show they don’t expect a cut.
The Fed vice chairman told the forum he also looks to survey measures as well as market signals in trying to determine where inflation expectations stand.
“As I look at all of this evidence from market signals, surveys, and econometric models, I judge that inflation expectations reside at the low end of the range I consider consistent with our price-stability goal of 2%,” he said.