(Bloomberg) — The Federal Reserve is on track to begin increasing interest rates in 2023 if the economy performs as policy makers are projecting, Vice Chairman Richard Clarida said Wednesday.
The “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 to a webinar held by the Peterson Institute for International Economics.
The Fed has said it will keep short-term interest rates pinned near zero until the labor market has reached maximum employment and inflation has risen to 2% and is on track to moderately exceed that level for some time. In economic projections released in June, a preponderance of policy makers penciled in two interest-rate hikes by the end of 2023.
The economy has forged ahead strongly this year, after swooning in 2020 amid the pandemic. Gross domestic product rose at a 6.5% annualized rate in the second quarter, following a 6.3% gain in the first three months of the year.
“The monetary and fiscal policies presently in place should continue to support the strong expansion in economic activity that is expected to be realized this year, although, obviously, 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,” Clarida said.
He said that he expects the imbalances between supply and demand that are pushing up prices to dissipate over time and inflation expectations to remain anchored. But, he added, ‘the risks to my outlook for inflation are to the upside.”
As the economy has reopened, inflation has surged more than the Fed and most private forecasters expected. The personal consumption expenditures price index that the Fed targets rose 4% in June from a year earlier as supply snafus pushed up prices.
Clarida said his projection of an interest rate liftoff in 2023 is consistent with the 2% average inflation targeting regime that the Fed adopted last year and incorporates the reality of an expansionary fiscal policy that has resulted more than $2 trillion in excess household savings.
Clarida did not weigh in on the ongoing public debate among policy makers about when they should begin paring back their asset purchases, merely repeating the Federal Open Market Committee’s line that the issue will continue to be taken up in coming meetings.
Clarida’s term on the Fed board expires in January. Fed watchers don’t expect President Joe Biden to nominate him for another term.