Top Fed official says continued high inflation will be problematic for central bank

In remarks prepared for delivery Monday morning, Fed Vice Chairman Richard Clarida said those imbalances should end “without continuing upward pressure on price inflation and wage gains adjusted for productivity.”

At the same time, Mr. Clarida said inflation growth this year – which according to the Fed’s preferred gauge rose 4.4% in September from a year earlier – was far more than the central bank officials’ desired “moderate overshoot” of 2. . % inflation target.

“I would not consider the performance again next year as a policy success,” Mr. Clarida said. The Fed official said most of his colleagues who participate in rate-setting meetings believe the risk right now is higher than expected inflation results. .

Mr Clarida reiterated his earlier view that the economic situation could justify a hike in interest rates by the end of 2022. He said projections released after the Fed’s September meeting, in which most officials saw rates continue to rise in 2023 and 2024, were consistent with how the Fed should set policy under a new framework adopted last year. With your own point of view.

That framework called for the Fed to seek a period in which inflation should move slightly above the central bank’s 2% target in order to make up for the longer periods in which it went below the target. But officials have not bargained for a sharp rise in prices this year as the economy reopens, reopening global supply chains when they formally adopted the policy in August 2020.

The new framework was deliberately left unclear by Fed officials as to how high the amount of inflation officials desired, which has led to differing interpretations by bond investors and other close observers of the central bank as to what level of inflation the Fed will expect to see next. wants to increase.

Mr. Clarida has been a key architect of the framework, making his speeches closely monitored by how the central bank might interpret its objectives. His remarks on Monday suggested he believes the Fed will soon meet its target of allowing inflation to run above 2% to prevent consumers and households’ future inflation expectations from flowing too low. Will take

The Fed revised its structure partly due to concerns that the prevalence of the so-called zero limit, in which interest rates are cut and the Fed cannot provide traditional incentives by lowering rates, could upset policymakers in the future. can. .

But Mr. Clarida observed that when government spending policies aggressively boosted demand, such constraints were less relevant, as has been the case in the past year. One implication is that the Fed may see little reason to seek inflation running above its 2% target.

This story has been published without modification to the text from a wire agency feed