Fed Official Says Interest Rate Increases Could Be Warranted in 2023
Richard H. Clarida, vice chairman of the Federal Reserve, said in a speech Wednesday that if the economy meets its expectations, he believes it will be healed enough by the end of next year that the Fed begins to hike rates in 2023 – a significant statement from one of the most senior members of the policy making committee.
Mr Clarida said he expected inflation to moderate but stay slightly above the Fed’s 2% target – which the central bank would like to meet and would be on track to exceed for a while. some time – with unemployment falling sharply towards the Fed’s full employment target.
“I believe these three conditions necessary to raise the target range for the federal funds rate will have been met by the end of 2022,” Clarida said.
Mr Clarida said the unemployment rate “will have reached my maximum employment estimate” if it falls to around 3.8 percent by the end of next year. This is the level most Fed officials were forecasting in June. The unemployment rate currently stands at 5.9%, up from 3.5% before the pandemic but well below the 14.8% of its 2020 peak.
“The start of policy normalization in 2023 would, under these conditions, be very consistent with our new flexible framework for targeting average inflation,” said Mr. Clarida. He noted that the government’s massive response to the downturn in the pandemic had offset some of the limitations the Fed had faced in restoring the economy to full health, and that the central bank’s approach “must – and certainly can. – integrate this reality “.
The Fed’s median projection in June suggested that the central bank would not hike interest rates until 2023. Given that Fed officials give their estimates for the last quarter of each year, it is difficult to say whether the Mr. Clarida’s judgment – who seems to plead in favor of an increase in tariffs in early 2023 – is more aggressive than that of most of his colleagues.
Mr Clarida’s influence is tempered by the fact that his tenure on the Fed board expires early next year and that he has been appointed by the Trump administration, so there are strong chances that he will not be reappointed to this post. But he is the most senior official to date for setting a possible timeline for the interest rate hike, as Fed Chairman Jerome H. Powell has repeatedly said he was not. there is still time to discuss an increase in the federal funds rate.
Mr Clarida was also the chief architect of the Fed’s new policy framework, which was adopted last year and forecasts periods of inflation above the Fed’s 2% target to offset the periods of low price gains. By setting out the conditions under which the economy would satisfy this approach, his comments have served to more clearly define this new political standard – and, to date, somewhat amorphous.
Rate hikes are a question for next year, but the Fed is more immediately considering when and how to change its approach to its other monetary policy tool: large bond purchases. Officials are currently discussing slowing their $ 120 billion in monthly purchases.
“In the next meetings, the committee will again assess the progress of the economy towards our goals,” said Mr Clarida, suggesting through his use of the plural “meetings” that no decision will be taken at the next meeting. September.
“As we said, we will let you know in advance before making any changes to our purchases,” he added.
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