Possibility of US rate cut lower than market expectations, says former Fed vice chair

Richard Clarida, former vice chair of the Federal Reserve and global economic adviser to PIMCO, speaks during a press meeting at a hotel in Seoul, Thursday. Courtesy of PIMCO

The possibility of the U.S. Federal Reserve (Fed) deciding to cut interest rates in September has risen compared to three months ago, yet it remains lower than market expectations, according to Richard Clarida, former vice chair of the Fed from 2018 to 2022.

"The Fed projections did indicate that most members of the committee believe that it will be appropriate to cut rates at least once this year. We agree with that," Clarida said during a press meeting hosted by PIMCO, a global asset management firm, Thursday. He is serving as a global economic adviser for the firm.

However, Clarida believed that the market pricing, which expects an 80 percent chance of a cut in September, may be a "little high."

"The Fed believes that inflation appears to be on a path down to target," he said. "The Fed would really much like to avoid a hard landing. I think that does line up at least one cut this year and potentially starting that process commence in September. But I don't think it's yet 100 percent."

Clarida said the upcoming additional inflation data will play a significant role in the Fed's decision.

"Some other central banks, like Korea, have yet to cut rates. That will depend on the circumstances in each economy, and so I don't think there's any particular necessity or requirement that they follow each other," Clarida said.

In addition, Clarida dismissed market concerns that Trump's possible election would impact the Fed's decision on monetary policy. He emphasized that the decision would be "entirely data-dependent."

"The Fed came into the year thinking that the data would support cutting rates three times. The most sensible way to do that would have been to commence rate cuts in June, September and December. That would have actually simplified the sequence in relation to the political calendar, because they would have gotten a rate cut before the convention and the (presidential) debate," Clarida said.

However, the data didn't cooperate at that time, according to Clarida.

"The Fed makes decisions based on the data and what it needs to do to achieve its objectives. And oftentimes that does mean hiking or cutting rates in a presidential election," he said.

Clarida served as a vice chairman of the Fed under the Trump administration. In March 2020, during his tenure, the Fed lowered policy rates by 0.5 of a percentage point to deal with the impact of COVID-19.

He also mentioned that the only influence the president can wield is in appointing Fed board members. Yet, there will be no vacancies until May 2026. Even when a vacancy opens up, nominated individuals should undergo thorough monitoring. The president also cannot fire a Fed chair, contrary to Trump's willingness, unless there is cause, such as inefficiency or negligence.

In a separate presentation, Clarida also mentioned that the early 2020s inflation shock and steep policy rate hikes produced a "generational reset" higher in bond yields, facing a global rate cut cycle by central banks. He suggested that opportunities across global bond markets also appear attractive and diverse, with active country and security selection being key.