WASHINGTON (Reuters) – US Federal Reserve officials on Monday shifted their focus toward a monetary policy debate that will flare up in the coming months as the Federal Reserve slows the pace of asset purchases, clearing the way for an interest rate hike sooner. Next year.
At the center of the debate will be an assessment of how many jobs the economy can add, and how much higher inflation can be tolerated, given that the rate of price increases is already well above comfortable levels. Read more
Fed Vice President Richard Clarida said that while the US central bank remains “far from considering raising interest rates,” if its current forecasts for the economy prove correct, “the necessary conditions for raising the Fed’s target range will be by the end of 2022.”
Inflation to date already represents “much more than a ‘moderate'” exceedance of the long-term 2% inflation target, Clarida said, and I would not consider repeating the performance next year as a policy success.
Economists expect a government report this week showing that consumer price inflation rose 5.8% in the twelve months through October, in what would be the fifth consecutive month in which prices have risen 5% year-on-year.
He said economic growth should push the unemployment rate to 3.8% by the end of next year, and “eliminate a 4.2 million ’employment gap’ compared to the ‘months before the pandemic’.”
At this point, the interest rate path similar to the path Fed officials set out in September would be “fully consistent” with the Fed’s new framework to reach the 2% inflation target and reach “maximum employment,” Clarida said in notes. prepared for display. At the Brookings Institution.
This “point chart” showed that 18 Fed officials were evenly divided on the need to raise interest rates next year, with the majority showing rates rising more steadily in 2023 and 2024.
In separate comments, St. Louis Fed President James Bullard reiterated his view that the Fed will need to raise interest rates twice next year — as US labor markets are already too tight, fueling inflation by raising wage and compensation costs.
A government report on Friday showed that the unemployment rate fell to 4.6% in October, still above the 3.5% level before the pandemic but well below the high of 14.8% in April 2020.
“We’re going to see downward pressure on the unemployment rate and we’re going to continue to see a very hot labor market as compensation increases,” Bullard told Fox Business Network. “We have quite a bit of inflation here…we definitely want to see that closer to our inflation target.”
“If inflation is more consistent than we are saying now, I think we may have to take a little bit of urgent action in order to keep inflation under control,” Pollard said, adding that he feels that many of the millions of Americans who have left are unlikely to return to the workforce during the pandemic. The labor market, which leads to a tight supply of labor.
Fed Governor Michael Bowman echoed those concerns in a separate appearance later today.
“We are making great strides toward our ultimate goal of employment, and I’m watching for signs that the labor market may become very hot,” Bowman told Women in Housing and Finance. “But my main concern again is the inflation outlook, which has been high for much longer than most of us expected earlier this year.”
High inflation poses a particular hardship to the elderly and the poor, she said, and higher energy and food prices could raise inflation expectations more broadly than many realize.
“I am concerned about supply chain disruptions and labor shortages driving up inflation and will continue to monitor these developments closely,” she said.
The Fed is currently on track to end its bond purchases completely by the middle of next year, and Evans and others cautioned against viewing the process as sending any direct signal about the timing of an interest rate increase.
“I don’t expect the fed funds rate to go up before tapering is complete,” Philadelphia Fed President Patrick Harker said during a hypothetical event organized by the Economic Club of New York. But we are watching inflation closely and are ready to take action if conditions warrant it.
In a separate appearance, Charles Evans, President of the Federal Reserve Bank of Chicago, stuck to his view that the current rise in inflation was likely to be temporary, but he also appeared unsure of those expectations.
He said that there are indications of widening inflation pressures. “It represents a greater upward risk to my inflation outlook than I could have imagined last summer.”
However, he told reporters after his speech, there is a “major hindrance” to accelerating the process of gradual decline; To do so, he said, he would need to see a world that is “totally different” from what he currently expects. Today’s strong inflation readings are mostly driven by supply shocks that will eventually fade, he said, adding that he sees the Fed can wait until 2023 before it needs to raise rates.
“I still tend to think we have time to be patient,” he said.
Covering by Howard Schneider and Anne Sapphire with reporting by Junelle Marty and Lindsey Dunsmuyer Editing by Mark Potter, Andrea Ricci and Jonathan Otis
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