Updates from the US economy
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Senior Federal Reserve officials began to outline the path to the eventual withdrawal of monetary policy support, citing the strength of the economic recovery despite a resurgence in Covid-19 infections.
Richard Clarida, vice president of the US central bank, laid the groundwork on Wednesday for cutting the Fed’s $ 120 billion asset purchase program and raising interest rates by 2023 , which would be the first since rates were cut to zero early on. of the pandemic.
In a speech at an event hosted by the Peterson Institute for International Economics, Clarida said “progress” had been made towards the Fed’s targets of full employment and 2% average inflation, and noted that the economy was heading towards thresholds that would justify an adjustment to the central bank’s bond purchase program.
His comments align with those made by Fed Chairman Jay Powell following a monetary policy meeting last week, which presented the first “deep dive” into the potential timing, pace and makeup of this coming decision.
Booming economic growth and higher than expected inflation figures have reinforced arguments by more hawkish members of the Fed to speed up the removal of political support, as the doves highlight the alarming spread of the coronavirus variant Delta and the uneven recovery of the labor market.
In an interview with CNBC on Monday, Fed Governor Christopher Waller called for an accelerated timetable, urging the central bank to “go early and fast” to “cut” its bond purchases. If the August and September employment reports showed subsequent gains of between 800,000 and 1 million new positions, that might be enough to warrant a decision, he said.
“In my opinion, this is substantial progress, and I think you might be ready to make an announcement by September,” Waller said, adding that the Fed may have to “push things back for a few months” if these improvements did not materialize.
A shorter time frame was needed, he said, to ensure that the central bank was in a good position to raise interest rates as early as 2022.
“I’m not saying we would, but if we wanted to, we need to have some leeway by the end of the year,” he added.
Clarida suggested on Wednesday that he did not support the move as early as 2022, arguing instead for an adjustment in 2023 if the economic forecasts set out at the June meeting come true.
The median of Fed officials’ estimates predicted gross domestic product growth of 7% this year, with the unemployment rate falling to 4.5% and further declining in 2022 and 2023 to 3.8% and 3.5%, respectively. Core inflation is expected to settle at 3%, before falling back to 2.1% in 2022.
Under the new framework unveiled last year, the Fed said it needed to hit maximum jobs and see inflation climb to 2% and be on track to “moderately exceed 2% for a while.” before take off.
“If the outlook for inflation and unemployment that I summarized earlier turn out to be the actual results of inflation and unemployment achieved over the forecast horizon, then I think these three conditions necessary for raising the target range for the federal funds rate will have been reached by the end of 2022, ”he said on Wednesday.
Clarida said he was watching the inflation numbers, which are well above expectations, noting that if core inflation came this year “to or definitely above” 3 percent, he would consider that “much more than a ‘moderate’ overshoot” of the Fed’s long-standing 2 percent target.
“There are risks to every outlook, and I think the risks to my inflation outlook are on the rise.” he added.