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Fed Vice Chair Richard Clarida said that substantial progress is still “a ways to go” on the US’ economic recovery from the Covid-19 pandemic shock, reported Reuters citing an interview with CNBC. As we get closer to that point, said Clarida, it will become clear. Moreover, speculated Clarida, if the Fed was to reach its inflation and employment goals sooner than currently expected lift-off (i.e. rate hikes) could be sooner as well.

On the economy, Clarida said that though we could have a rough couple of months, the other side of this has very positive news on vaccines and he does not think the US will have a double recession. Clarida said he feels very optimistic about the economy as we get into 2021 and sees growth above 4% for the year.

On the Fed’s current policy stance, Clarida noted that we think we are providing very ample support for the economy, that asset purchases are at a very robust pace and that policy is exactly where we want it to be. The Fed will return CARES act appropriations as US Treasury Secretary Steven Mnuchin has asked.

On the prospect for further fiscal support, Clarida first noted that given the nature of shock, fiscal and monetary policy both have roles to play, before adding that additional fiscal support would certainly be very welcome and that the economy could certainly benefit from fiscal support along the lines currently being discussed on Capitol Hill.

Market Reaction

Despite the generally upbeat tone of Fed Vice Chair Clarida’s remarks (no reference to near-term Covid-19 induced economic pain, upbeat on the outlook for 2021 and happy with policy on hold as is), there has been very little market reaction. Indeed, volumes have thinned drastically as traders exit for the weekend, with many North American and European participants having completed their final pre-Christmas working week of the year. 

The Dollar Index (DXY) continues to trade just above the 90.00 level, with markets predominantly focused on 1) Brexit negotiations over the weekend and 2) US fiscal stimulus negotiations, which according to the latest comments from Senator Thune, are unlikely to culminate in a deal on Friday but could come by Sunday.