Fed’s Clarida Sees Interest-Rate Liftoff Test Met by End of 2022

(Bloomberg) -- Federal Reserve Vice Chair Richard Clarida said the “necessary conditions” to raise the U.S. central bank’s benchmark lending rate from near-zero will probably be in place at the end of next year.

“While we are clearly a ways away from considering raising interest rates,” Clarida said in remarks prepared for delivery Monday to a symposium on monetary policy hosted by the Brookings Institution in Washington, “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,” he said, referring to the labor market and inflation tests laid out by the Fed for liftoff.

Fed officials last week left rates near zero and announced they would begin scaling back their massive asset purchases program later this month on a schedule that would wrap up the process by mid-2022. They’ve said the taper decision did not imply a direct signal on interest rate policy. Some officials, worried by high inflation, have argued for flexibility to raise rates as soon as the taper ends.

Clarida said he expected inflation pressures to ease “as the labor market and global supply chains eventually adjust and, importantly, do so without putting persistent upward pressure on price inflation and wage gains adjusted for productivity.” U.S. central bankers in August 2020 adopted a new approach to the central bank’s goals for employment and price stability. The inflation target was redefined as 2% on average, to overcome years of undershooting. 

Fed officials have declined to define the time period over which they believe an average should be struck. The maximum employment objective was also redefined as a “broad-based and inclusive goal,” and officials said they would no longer prejudge the level maximum employment as they set policy --although they still produce a forecast of an unemployment rate consistent with stable prices. In September, that long-run assessment was 4%.  Clarida added that the risks to inflation are to the upside, and said he would not want to see another year of inflation overshoot along the lines of 2021. Inflation by the Fed’s preferred measure rose 4.4% for the 12 months ending September, and minus food and energy it rose 3.6%.

“Inflation so far this year represents, to me, much more than a ‘moderate’ overshoot of our 2% longer-run inflation objective, and I would not consider a repeat performance next year a policy success,” he said.

Central bank strategies from Canada and Britain to the Eurozone and the U.S. are being tested by bouts of inflation as economies emerge from pandemic downturns. 

©2021 Bloomberg L.P.

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