Richard H. Clarida, the Federal Reserve’s vice chair, said in speech on Wednesday that if the economy meets his expectations, he thinks it will be healed enough by the end of next year for the Fed to start raising rates in 2023 — a meaningful statement coming from one of the highest-ranking members of the policy-setting committee.
Mr. Clarida said he expected inflation to moderate but remain slightly above the Fed’s 2 percent target — which the central bank would like to hit and be on track to exceed for a time — with unemployment dropping sharply toward the Fed’s full employment goal.
“I believe that these three necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022,” Mr. Clarida said.
Mr. Clarida said that the unemployment rate “will have reached my assessment of maximum employment” if it drops to around 3.8 percent by the end of next year. That is the level most Fed officials projected in June. The jobless rate currently stands at 5.9 percent, up from 3.5 percent before the pandemic but much lower than the 14.8 percent at its 2020 peak.
“Commencing policy normalization in 2023 would, under these conditions, be entirely consistent with our new flexible average inflation targeting framework,” Mr. Clarida said. He noted that the government’s big spending response to the pandemic downturn had offset some of the limitations the Fed had faced in returning the economy to full health, and that the central bank’s approach “must — and certainly can — incorporate this reality.”
The median Fed projection in June suggested that the central bank would not lift interest rates until 2023. Because Fed officials give their estimates for the final quarter of each year, it is difficult to tell whether Mr. Clarida’s judgment — which seems to argue for an early-2023 rate increase — is more aggressive than that of most of his colleagues.
Mr. Clarida’s influence is tempered by the reality that his term on the Fed board expires early next year, and he was nominated by the Trump administration, so there is a good chance he will not be reappointed to the post. But he is the highest-ranking official yet to set out a possible timeline for lifting interest rates, since the Fed chair, Jerome H. Powell, has repeatedly said it is not yet time to discuss raising the federal funds rate.
Mr. Clarida was also a chief architect of the Fed’s new policy framework, which was adopted last year and calls for periods of inflation above the Fed’s 2 percent target to offset periods of weak price gains. By laying out the conditions under which the economy would satisfy that approach, his comments served to more clearly define that new — and, to date, somewhat amorphous — policy standard.
Rate increases 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: big bond purchases. Officials are discussing slowing down their $120 billion in monthly purchases now.
“In coming meetings, the committee will again assess the economy’s progress toward our goals,” Mr. Clarida said, suggesting through his use of the plural “meetings” that no decision is coming at the upcoming September gathering.
“As we have said, we will provide advance notice before making any changes to our purchases,” he added.
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