Fed can 'hardly ignore' global risks, Clarida says

Policymakers in the US can "hardly ignore" the impact that Brexit, a sharp slowdown in global growth prospects, or trade tensions might have on their economy as America, a top Federal Reserve official said.

Together with muted inflation pressures, that means that they can afford to be patient and data dependent when assessing the next best step for policy.

In remarks prepared for a speech at the French central bank's "The Euro Area: Staying the Course through Uncertainties" symposium, Fed vice chairman, Richard Clarida, said that the American economy's growing integration with the rest of the world meant it was more exposed to so-called 'shocks' from overseas.

Since the 1960s, both US exports and imports had tripled in size as a proportion of the country's gross domestic product, with their sum now equal to roughly 30% of annual output, which was "still relatively small by international standards, but certainly notable".

In parallel, financial linkages had multiplied, with the sum of its external asses and liabilities surging from about 25% of GDP in 1960 to over 300% nowadays.

Not lost on market participants were Clarida's references in his speech to the multiple occasions on which, in the past, the Fed had eased policy in response to shocks from overseas.

According to Clarida: "The message from these recent episodes is not just about the importance of timely policy adjustments by the central bank.

"It is also about the importance of the enhanced resilience of financial institutions that has been achieved since the Global Financial Crisis. Undoubtedly, this resilience helped prevent adverse financial shocks from contributing to a more serious downturn."