The economic circumstances required for the US Federal Reserve to raise interest rates could be satisfied by the end of 2022, according to US Federal Reserve Vice Chair Richard Clarida.
Clarida stated at a virtual event held by the Brookings Institution on Monday that if the unemployment rate falls to 3.8 percent from its current level of 4.6 percent by the end of 2022, the US labour market will have reached its estimation of maximum employment.
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 the 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.
Since the beginning of the pandemic, the Federal Reserve has vowed to keep the federal funds rate near zero, which is a record low.
Meanwhile, the central bank stated last week that it will begin decreasing its asset purchases later this month, citing rising inflation as a major concern.
Clarida pointed out that achieved PCE inflation so far this year is significantly more than a “modest” overshoot of the longer-run inflation target of 2%.
“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.
(With IANS inputs)