US Fed Vice Chair signals possibility of rate hikes

Washington: US Federal Reserve Vice Chair Richard Clarida said that the economic conditions, necessary for the central bank to raise interest rates, could be met by the end of 2022.

At a virtual event hosted by the Brookings Institution, Clarida said that by the end of 2022, the US labor market will have reached its assessment of maximum employment if the unemployment rate falls to 3.8 per cent from its current level of 4.6 per cent.

Core personal consumption expenditures (PCE) inflation, the Fed’s preferred inflation gauge, is expected to surge to at least 3.7 per cent this year before reverting back to 2.3 per cent in 2022, 2.2 per cent in 2023, and 2.1 per cent in 2024, he said.

“The baseline outlook for inflation over the three-year projection window reflects the judgment, shared with many outside forecasters, that under appropriate monetary policy, most of the inflation overshoot relative to the longer-run goal of 2 per cent will, in the end, prove to be transitory,” he added.

While the Fed is “clearly a ways away from” considering raising interest rates, Clarida said he believed that these necessary conditions for raising the target range for the federal funds rate will have been met by the end of 2022.

The Fed has pledged to keep the federal funds rate unchanged at the record-low level of near zero since the start of the pandemic.

Meanwhile, the central bank announced last week that it would start tapering its asset purchases later this month amid great concerns over elevated inflation levels.

Clarida noted that the realized PCE inflation so far this year represents much more than a “moderate” overshoot of the 2 per cent longer-run inflation objective.

“I would not consider a repeat performance next year a policy success,” he said, adding Fed officials believe that the risks to the outlook for inflation are to the upside.

Image courtesy of (MarketWatch)

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