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Aileen Chuang

The Federal Reserve is likely to cut interest rates three times this year as inflation heads downward and the labour market cools, according to Richard Clarida, who was vice-chair of the US central bank from 2018 to 2022.
Any further improvements in inflation data and increases in the unemployment rate in the US will inform the Fed’s decision, Clarida, currently the global economic adviser for asset management giant Pimco, said in an interview in Hong Kong.
Pimco’s forecast is for two rate cuts, with “a real possibility of a third,” he said.
“Since May, the inflation data and the employment data have been very Fed-friendly,” he added. “Over the last three months, inflation is now running around 2 per cent again and the labour market has come into better balance.”
Clarida said that with inflation returning close to target, the Fed has begun to elevate the importance it places on the employment data.


Earlier this month, Fed Chair Jerome Powell testified before Congress that the labour market was “strong but not overheated” and the US economy was no longer overheated, raising the prospects of an interest-rate cut.
In June, the US unemployment rate rose to 4.1 per cent, a two-and-a-half-year high but still historically low.
Traders are pricing in a near-certain rate cut at the Fed’s September meeting, according to CME Group’s FedWatch tool, which forecasts rate movements based on Fed fund futures trading data.
“A lot of people are waiting for the Fed to get in that rate cut. There’s something like US$5 or $6 trillion sitting in US money market funds. It’ll be a big event when it does happen,” Clarida said. His firm also holds the view that the first rate cut could happen in September.
The bond market has been deeply affected by the Fed raising interest rates 11 times between 2022 and 2023. The steep increases have delivered a “generational reset” in the starting yields of quality fixed-income investments, an indication of the total return on bond investment, Clarida said.
There is an attractive long-term outlook for fixed-income returns on a risk-adjusted basis relative to other assets, he said.
Asian investors, in particular, will benefit from a potential reduction in currency hedging costs as rates fall, Clarida added. Fed rate cuts will narrow the spread with Asian central bank rates, thereby relieving the pressure on local currencies.
“In a world where the Fed is cutting interest rates, that will tend to reduce the cost of hedging and probably over time increase the attractiveness, at least for some Asian investors, of investing in US bonds,” said Clarida.
Surprises could still happen between now and December, he cautioned. Sticky inflation could halt rate cuts, the US economy could slow more sharply prompting the Fed to cut rates faster, or heightened geopolitical risks could push down bond yields.
Clarida was appointed as a Fed vice-chair by Donald Trump. During his tenure, in March 2020 the central bank orchestrated two rate cuts to steady the economy during Covid-19.
Clarida shared his view on artificial intelligence (AI), which has sparked rapid stock market gains and record-high company valuations.
“AI is going to be transformative, but it may not show up in macroeconomic data for several years,” he said, referring to data such as productivity output and inflation.
And whether the technology’s productivity growth will be sustainable is also up for discussion, he added, citing the personal computer boom in the 1980s.


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‘Real possibility’ of a third cut as inflation heads downward and the labour market cools, says Richard Clarida, who was Fed vice-chair from 2018 to 2022


The Federal Reserve is likely to cut interest rates three times this year as inflation heads downward and the labour market cools, according to Richard Clarida, who was vice-chair of the US central bank from 2018 to 2022.


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