Scott Mlyn | CNBC
Federal Reserve Vice Chairman Richard Clarida said in a speech on Wednesday that the central bank is expected to meet its economic targets by the end of next year and start raising interest rates again in 2023.
While he said the job market has yet to recover, Clarida noted that inflation is on track to meet and exceed the Fed’s 2% target. This sets the stage for the Fed to meet the benchmark of “substantial further progress” it set itself before starting to tighten policy.
“Given these prospects and as long as inflation expectations remain firmly anchored to the longer-term target of 2% … the start of policy normalization in 2023 would, under these conditions, be entirely consistent with our new flexible framework for targeting average inflation, ”said the policymaker. Peterson Institute for International Economics in a virtual appearance.
Clarida, however, gave no timeline for when the Fed could start cutting back on its monthly asset purchases. Indeed, the central bank bought $ 120 billion per month in treasury securities and mortgage-backed bonds to maintain liquidity in financial markets amid the Covid crisis.
While Clarida noted that officials were discussing when they could withdraw those bond purchases, he only said the public would be notified in time before a decision was made.
The speech comes amid growing concern over a spike in the economic recovery that began in April 2020, as well as spike in inflation that has pushed price hikes far beyond the target of the Fed.
Clarida noted that the prices of basic personal consumption expenditure – the Fed’s preferred measure – have been operating at a rate of 2.7% since February 2020, just before the Covid-19 pandemic hit. If his future inflation expectations materialize, “then I think … the conditions for raising the target range for the federal funds rate will have been met by the end of 2022.”
Current market prices have changed in terms of rate expectations, with futures linked to the Fed’s benchmark rate now showing only a 43.7% chance of a hike by the end of 2022, according to the CME.
However, market sentiment around the Fed is volatile, and Clarida’s comments, particularly around inflation, indicate that a move may come sooner.
“If, as expected, core PCE inflation this year reaches, or certainly above, 3%, I would consider this to be much more than a ‘moderate’ overshoot of our longer-term inflation target of. 2%, “he said. “As always, there are risks to every outlook, and I think the risks to my inflation outlook are on the rise.”
In a framework adopted last year, the Fed said it would tolerate a “moderate” rise in inflation above 2% in the interest of achieving a comprehensive and inclusive employment target.
While the unemployment rate has fallen to 5.9% from its pandemic peak of 14.8%, there are still about 7.6 million fewer Americans working today than before the crisis. Payroll processing company ADP reported Wednesday that private employers created just 330,000 jobs in July, well below the estimate of 653,000.
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