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Fed's Clarida supports interest rates liftoff in 2023

EconomyAug 04, 2021 06:00PM ET
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© Reuters. FILE PHOTO: Federal Reserve Vice Chair Richard Clarida talks on the phone during the three-day "Challenges for Monetary Policy" conference in Jackson Hole, Wyoming, U.S., August 23, 2019. REUTERS/Jonathan Crosby

By Lindsay (NYSE:LNN) Dunsmuir and Ann Saphir

WASHINGTON (Reuters) - The U.S. economy is on track by the end of next year to meet the employment and inflation hurdles the Federal Reserve has set for raising interest rates, consistent with a liftoff in borrowing costs in 2023, Fed Vice Chair Richard Clarida said on Wednesday.

"I believe that these ... necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022," Clarida said in a webcast discussion hosted by the Peterson Institute for International Economics. "Commencing policy normalization in 2023 would, under these conditions, be entirely consistent with our new flexible average inflation targeting framework."

Clarida said he expects some "pretty healthy" U.S. job gains this fall as factors holding back labor supply dissipate.

"If my baseline outlook does materialize then I could certainly see supporting announcing a reduction in the pace of our purchases later this year," he said during a question-and-answer session, referring to the U.S. central bank's $120 billion in monthly purchases of Treasuries and mortgage-backed securities.

Coming just days after Fed Governor Christopher Waller signaled his view that the Fed ought to begin paring the asset purchases by October, Clarida's comments appear to set up the central bank for a quicker path toward reducing support for the economy than had been widely understood.

Fed Chair Jerome Powell said last week that the jobs recovery still had some "ground to cover" before the Fed could begin to reduce its bond-buying program, and the Fed was "clearly a ways away" from considering raising interest rates, even as he acknowledged the central bank was monitoring inflation carefully to make sure the current overshoot is not persistent.

The benchmark 10-year Treasury yield rose after Clarida's remarks and the release of a report showing U.S. services industry activity jumped to a record high in July.

Interest rate futures in late-morning trading priced in a high likelihood of the Fed raising its benchmark overnight interest rate, currently near zero, three times by the end of 2023.

In economic projections released in June, the median forecast of Fed policymakers was for two rate hikes in 2023.

INFLATION OUTLOOK

Inflation continues to run well above the Fed's 2% goal, but there are still 6.8 million fewer people employed than just before the onset of the coronavirus pandemic.

In his remarks on Wednesday, Clarida said he expects that gap to have been filled, and the Fed's full employment mandate to have been met, by the end of 2022.

While he said he still expects current high inflation readings to come back down, if the Fed's preferred inflation gauge comes in above 3% this year, he also said he would consider that more than a moderate overshoot of its inflation goal.

"I believe that the risks to my outlook for inflation are to the upside," Clarida said. Policymakers should look at the Fed's two goals - full employment and inflation - "in tandem," Clarida said.

He also noted the rapid spread of the Delta variant of the coronavirus is "clearly" a downside risk, and may be what is behind the recent and surprising drop in global government bond yields, rather than any loss in traction on inflation expectations.

But, he noted, current projections for U.S. gross domestic product growth this year "would be the most rapid return following a recession to ... the trend level of real GDP in 50 years."

Fed's Clarida supports interest rates liftoff in 2023
 

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Comments (3)
Louis Lipps
Louis Lipps Aug 04, 2021 6:10PM ET
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Anyone else notice how the one guy who doesn't want to taper is the one guy up for reelection as chair?
JAMES CUNHA
JAMES CUNHA Aug 04, 2021 5:47PM ET
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With all these companies posting fantastic earnings, could someone please explain to me why tapering is necessary?
JAMES CUNHA
JAMES CUNHA Aug 04, 2021 5:47PM ET
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Meant to say... why the Fed has already been tapering asset purchases?  The problem I see is that the Fed is directly meddling with the stock market and the valuation of stocks.  It used to be that overvalued stock would be shorted until the price dropped down to a fair value.
Louis Lipps
Louis Lipps Aug 04, 2021 5:47PM ET
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JAMES CUNHA  The real head scratcher, James, is the CDC decided to delay the evictions another two months despite what you wrote.  And it was the CDC that did it.  I never realized the power the CDC had and it bothers me.
ben sc
ben sc Aug 04, 2021 4:16PM ET
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when they finally admit inflation is tied to monetary policy they'll overreact and rates will rise too much too quickly. fed has 2 mandates and are faltering on both fronts at the moment.
 
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