Fed Models and Math 'Are Tools, Not Handcuffs,' Says Richard Clarida

Former Fed Vice Chair Richard Clarida spoke with Bloomberg following remarks from Fed Chair Jerome Powell at the Jackson Hole Economic Symposium. Clarida discussed the current risk balance in the labor market and efforts to protect Fed independence amidst mounting political interference. He also spoke about data integrity, stressing that the models and mathematics that drive Fed decisions are just tools, not handcuffs.

Federal Reserve Chair Jerome Powell carefully opened the door to an interest-rate cut in September, pointing to rising risks for the labor market even as worries over inflation remain.

“The stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance,” Powell said in remarks prepared for the Fed’s annual conference in Jackson Hole, Wyoming on Friday. “Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”

Following Powell’s remarks investors boosted bets that the Federal Open Market Committee would cut rates at their Sept. 16-17 meeting.

“He used the speech to solidify expectations for 25 basis points in September,” James Bullard, former President of the St. Louis Fed, said in an interview on Bloomberg Television. “He leaned into the most recent labor market report, which was very soft. And so I think that’s a done deal.”

The signal comes at a time when Fed officials are divided over how and when to adjust policy in the coming months. Some have pointed to the labor market’s resilience. Others warn that nascent signs of weakness in employment could metastasize into a more significant downturn.

Powell said the labor market is in a “curious kind of balance” resulting from a marked slowdown in both the supply of and demand for workers. He cited employment data for July, which showed jobs growth in recent months was substantially weaker than previously reported.

“This unusual situation suggests that downside risks to employment are rising,” he said. “If those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”

But he continued to argue that policymakers must guard against the prospect that President Donald Trump’s tariffs lead to persistent inflation. He said the effects of tariffs on consumer prices are “now clearly visible,” but it’s reasonable to expect the effects will be relatively short lived.

“It is also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed,” Powell said.

“When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate,” he added.

Treasury yields tumbled, the S&P 500 extended gains and the dollar fell. Powell was greeted in the room with a standing ovation from the audience.

Powell’s speech comes amid unprecedented pressure from Trump and his allies aimed at getting the central bank to lower borrowing costs, threatening the Fed’s independence in determining monetary policy.

Trump took his campaign to a new level on Friday. As Powell was speaking, the president said he would fire Fed Governor Lisa Cook if she doesn’t resign. Trump had already called on Cook to depart over allegations that she provided false information in applying for two mortgages. Cook, who is at the Jackson Hole conference, responded Wednesday that she had no intention of stepping down.

Powell didn’t address the Cook affair in his remarks and didn’t take questions from the audience of central bankers and economists.

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