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The economy is expected to continue growing so that the labor market recovers and inflation rises above 2% on average long enough that by the end of 2022, the US central bank can start raising rates. interest in early 2023, Federal Reserve Vice Chairman Richard Clarida said. Wednesday.
Given that the forecast “starting the standardization of policies in 2023[…]would be fully consistent with our new flexible framework for targeting average inflation, ”Clarida said in remarks to the Peterson Institute for International Economics.
Clarida didn’t dwell on the Fed’s impending decision on when and how to start slowing the $ 120 billion in monthly asset purchases.
He said the Fed would continue to review the cut “at future meetings.” The plural of the word “meeting” could be important as some Fed officials are agitating for a decision at the next meeting at the end of September.
During the question-and-answer session, Clarida said that if the economy turned out as he hoped, “I could certainly see myself supporting the announcement of a moderation in the pace of buying later this year.”
“We will notify you in advance before making any changes to our purchases,” he added.
Clarida focused more on when the Fed might raise interest rates.
Clarida said he agreed with comments from Fed Chairman Jerome Powell last week that a hike in interest rates is not on the Fed’s radar screen.
The central bank has adopted a new framework, saying it will aim to achieve inflation “moderately above” 2% for a period of time, so that in the longer run inflation will average 2%. The central bank also wants to achieve “maximum employment”.
Clarida said these conditions for the first rate hike will be met “by the end of 2022”, allowing for the first move in 2023.
Clarida said he expects inflation to be above 2.1% in 2022 and 2023. Combined with soaring inflation this year, that would satisfy the Fed’s condition for inflation above. 2% for a while.
Seven Fed officials predicted an earlier take-off of the interest rate hike, with the first rate hike in 2022. The Fed’s dotplot forecast calls for a majority of the 19 senior officials to predict two rate hikes of interest by the end of 2023.
The Fed vice chairman said he viewed the recent rise in inflation as “transitory.” But he added that the risks of higher inflation are greater than the risks of low inflation.
If core PCE inflation stays above 3%, it would be more than a “moderate” overshoot of the Fed’s 2% target the central bank is aiming for, Clarida said. But he did not say whether political action would be necessary.
Core PCE was operating at a rate of 3.5% in June, the highest in 30 years, but Clarida said he was in favor of a different measure – core PCE from February 2020 – to mitigate the effects of basis of the pandemic.
This measure of inflation runs at a rate of 2.7% until June 2021 and is expected to remain above 2% in 2022 and 2023, he said.
Stocks retreated after Clarida’s comments with the DJIA Dow Jones Industrial Average,
down 233 points late in the morning. The yield of the 10-year Treasury bill TMUBMUSD10Y,
rose sharply to 1.21%, still well below the rate of 1.75% observed at the end of March.
Clarida said she was surprised by the extent of the decline in bond yields since the spring. He dodged questions about the cause of the move.
“There’s a lot going on, I’m watching it closely,” he said.
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