Fed’s no. 2 official: Could announce tapering by year-end and rate hike by early 2023

Spark Global Limited reports:

The Federal Reserve’s no. 2 official said on Wednesday that the central bank could meet its economic goals by the end of next year and start raising interest rates in 2023 if the U.S. economic recovery progresses as he expects.

While the job market still needs to recover, inflation will hit and exceed the Fed’s target, setting the stage for “further substantial progress,” Richard Clarida, fed vice chairman, said in an online speech at the Peterson Institute for International Economics.

 

The Fed has insisted since the end of last year that it will buy $120bn a month until the economy makes “further substantial progress” towards maximum employment and 2 per cent inflation.

Mr Clarida said the upside risks to inflation expectations, combined with his expectation of a steady recovery in the Labour market, meant the economy could be primed for an increase in short-term interest rates in more than a year’s time. He said he would support raising interest rates in early 2023 if U.S. unemployment falls to 3.8 percent by the end of 2022.

“Given this outlook, and as long as inflation expectations remain stable above the 2 per cent longer-run target… Embarking on policy normalisation in 2023 would be fully consistent with our new flexible average inflation targeting framework, “Mr Clarida said.

Under the Fed’s new monetary policy framework, announced last year, the central bank will allow inflation to be “moderately above” 2 per cent for some time in order to achieve its goal of maintaining inflation at a 2 per cent average in the long run.

But he also acknowledged that the surge in COVID-19 cases caused by the Delta variant could pose some risks to the outlook. “In the coming months, we will have a much better understanding of the Labour market than we do now,” he said. “The post-pandemic recovery and expansion is nothing like anything we’ve experienced before, so it’s good for us to be modest in predicting the future.”

 

Clarida also noted that he thinks the economy has “made progress” and could be ready for a tapering of the Fed’s bond purchases by the end of the year. “If my baseline expectations do materialize, then I would support an announcement later this year to slow the pace of bond purchases,” he said during a question-and-answer session.

“We will give advance notice of any changes to the programme,” Mr Clarida said.

Since June, the Fed has been buying at least $80 billion of Treasury bonds and $40 billion of mortgage-backed securities a month on a net basis in an effort to lower long-term borrowing costs.

In an interview with CNBC earlier this week, Fed Governor Christopher Waller said he expected the fed could start tapering its bond purchases as early as October. Similarly, Waller said he would like to see how labor market data unfold in the coming months. The Bureau of Labor Statistics releases its July jobs report on Friday.

The Fed’s dot plot, released in June, shows that 13 of 18 Fed officials expect the benchmark rate to rise at least once by the end of 2023; Eleven of them expect the benchmark rate to rise twice by the end of 2023; Seven expect the Fed to raise rates as early as 2022.

If the Fed starts raising rates in 2023, as Clarida predicts, he may no longer be on the Fed board. Clarida’s current term ends on January 31, 2022, and it is unclear whether the Biden administration would be willing to renominate him.