The Fed: Risk of recession isn’t high as long as Fed gets policy right, Clarida says

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Fed Vice Chairman Richard Clarida

The probability of a recession is not high if the Federal Reserve can set the right interest-rate policy, Fed Vice Chairman Richard Clarida said Thursday.

The risk of a recession remains low “with appropriate monetary policy,” Clarida said during a question-and-answer session sponsored by the Wall Street Journal.

Clarida, who is No. 2 at the central bank, was upbeat about the current economy even as recession fears were sparked this week by data showing contraction in the factory sector.

Clarida stressed the economy is in “a good place” with stable inflation. Financial conditions are also not tight. In addition, the savings rate rose to 8.1% in August. That means consumers have a “cushion” to survive slower growth, he said.

Clarida offered no explicit forward guidance about whether the Fed would cut rates again at its meeting on Oct. 29-30.

The Fed has cut rates by a quarter-percentage point at its past two meetings, in July and September.

Weak economic data over the past few days has raised investor expectations that the Fed would cut rates again when it meets at the end of the month.

Investors now see a 90% chance of a quarter-point cut later this month. That’s up from a 40% likelihood last week.

Clarida refused to be drawn into the discussion about the probability of an October rate cut, saying only that the Fed would “act as appropriate” to sustain the expansion.

Clarida didn’t seem too concerned by the recent weak data, saying that the global economy has been slowing for more than a year. The Fed has already factored in that U.S. manufacturing was being hurt by this slowdown, he said.

At the event, Clarida defended Fed Chairman Jerome Powell from one audience member, who criticized Powell for what he said was “rookie malfeasance.”

Clarida replied that Powell was doing “a fine job.”

Only seven of 17 Fed officials have called for another rate cut this year, according to the Fed’s “dot-plot” projections of interest rates. But this minority includes Clarida and Powell, and they have managed to pull the majority of the committee along with them in the first two rate cuts. There were three dissents in September.

In an earlier appearance on Thursday, Dallas Fed President Robert Kaplan seemed open to considering another rate cut in October.

Friday’s employment report could be pivotal for the outlook for interest rates. Economists expect that the economy added 150,000 jobs in September.

Read: Another poor U.S. jobs report would add to Wall Street gloom

Stocks rebounded a bit Thursday after a sharp selloff earlier in the week. The Dow Jones Industrial Average DJIA, +0.47%   rose 122 points, or 0.5%. The index was down almost 840 points on Tuesday and Wednesday.