WASHINGTON (Reuters) – The Federal Reserve should be in the position to begin raising interest rates in 2023, Fed Vice Chair Richard Clarida said on Wednesday, as he predicted the U.S. economy remains on track to meet the central bank’s employment and inflation goals.
“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 prepared remarks for 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.”
Fed officials hold a range of views on when to begin raising the central bank’s benchmark overnight interest rate, which is currently near zero, but several of them have sped up their forecast timeline for doing so. According to quarterly projections released at the Fed’s June policy meeting, thirteen of 18 policymakers now see rates higher in 2023, with seven of them penciling in a rates ‘lift-off’ as soon as next year.
Inflation continues to run well above the Fed’s 2% flexible goal, but there are still 6.8 million fewer people employed than just before the onset of the coronavirus pandemic. Fed Chair Jerome Powell said last week that the jobs recovery was still “a ways off” from where it needed to be to raise interest rates but acknowledged the central bank was monitoring inflation carefully to make sure the current overshoot is not persistent.
In his prepared remarks on Wednesday, Clarida said he expects the Fed’s full employment mandate to have been met by the end of 2022. While he still expects current high inflation readings to moderate, 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 the Fed’s inflation goal.
“I believe that the risks to my outlook for inflation are to the upside,” Clarida said.
He also noted the rapid spread of the Delta variant of the coronavirus is “clearly” a downside risk, but added that the 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.”
(Reporting by Lindsay Dunsmuir and Ann Saphir; Editing by Paul Simao)
