MNI: Clarida- Fed Liftoff Conditions Could Be Met End of 2022

Federal Reserve Vice Chair Richard Clarida said Wednesday that the necessary conditions for raising benchmark interest rates are likely to be met by the end of next year and officials will continue to assess pulling back asset purchases in coming meetings.

If the economy performs about as expected, "necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022," he said in the text of a speech. "Commencing policy normalization in 2023 would, under these conditions, be entirely consistent with our new flexible average inflation targeting framework," he said.

"My inflation projections for 2022 and 2023, which forecast somewhat higher inflation than do the SEP medians, would also, to me, satisfy the 'on track to moderately exceed 2 percent for some time' threshold specified in the statement," he wrote, adding that Fed staff's common inflation expectations index will likely continue to show inflation expectations are well anchored near 2%.

While the rapid spread of the Delta variant among the still considerable fraction of the population that is unvaccinated is clearly a downside risk for the outlook, he said, "I believe that the risks to my outlook for inflation are to the upside."

MAXIMUM EMPLOYMENT '22

"In light of these uncertainties, the Committee is rightly basing its judgments on outcomes, not just the outlook," he said.

The Fed Vice Chair said that in "coming meetings," the FOMC will again assess the economy's progress toward its goals on its assets purchases and the Fed" will provide advance notice before making any changes to our purchases."

"The economy has made progress toward these goals," on QE, he said.

Clarida added that while his assessment of maximum employment incorporates a wide range of indicators to assess the state of the labor market, he has been looking at others that have a history of being highly correlated with the unemployment rate, such as the Kansas City Fed's Labor Market Conditions Indicators.

"My expectation today is that the labor market by the end of 2022 will have reached my assessment of maximum employment if the unemployment rate has declined by then to the SEP median of modal projections of 3.8 percent," Clarida said according to prepared remarks for a speech at the Peterson Institute for International Economics.

Clarida's modal projection for the path of the unemployment rate is, according to the Atlanta Fed jobs calculator, consistent with a rebound in labor force participation to its estimated demographic trend. This is consistent with cumulative employment gains this year and next that, by the end of 2022, eliminate the 7 million "employment gap" relative to the previous cycle peak, he said.

The top Fed official also sees continued support to aggregate demand from fiscal policy, including the more than USD2 trillion in accumulated excess savings accruing from as yet unspent transfer payments.