Fed’s Clarida Says Months of 2% Inflation Needed for Liftoff

Federal Reserve Vice Chairman Richard Clarida said the central bank won’t consider raising interest rates from near zero until it actually achieves 2% inflation for at least a few months as well as full employment.

“We’re not going to even begin to think about lifting off, we expect, until we actually get observed inflation — and we measure it on a year-over-year basis, equal to 2%,” Clarida said Wednesday in a Bloomberg Television interview with Tom Keene, Lisa Abramowicz and Jonathan Ferro. “That’s at least — we could actually keep rates at this level even beyond that.”

The Federal Open Market Committee last week signaled rates would stay near zero through 2023 and adapted their post-meeting statement to reflect their new strategy — of allowing inflation to rise above 2% after periods of under-performance.

The guidance has generated some diverse takes from various Fed officials and economists, with Chicago Fed leader Charles Evans this week raising thepossibility of raising rates prior to reaching 2% on average.

“We don’t want it to be a fleeting, you know, one quarter and done,” Clarida said. “At that point we will assess what is the appropriate liftoff and timing, but that’s really down the road.”

The vice chairman said that liftoff is several years off, as the economy is recovering from the deepest recession since the Great Depression in the 1930s. He repeated the Fed’s call for additional fiscal support to help speed the recovery.

Deep Hole

“The economy is recovering robustly, but we are still in a deep hole,” he said. “Long term, the U.S. needs to get back on a sustainable fiscal path, but you don’t want to start that in the midsts of the worst economic hit in 90 years.”

The current slack in the economy is generating inflation that is undershooting the Fed’s goals, Clarida said. The upshot is the central bank must aim for higher than 2% inflation to offset weakness during downturns or the expectations of the public will drift below target, he said.

“We now think that to anchor inflation expectations at 2%, we need, coming out of recessions, to spend some time above 2% to balance off those times that we’ve been below,” Clarida said.

While Fed Chair Jerome Powell during a press briefing last week repeatedly described the policy committee’s new guidance as powerful, the vague wording of it has resulted in a wide variety of assessments.

Evans, answering questions during a virtual event on Tuesday, said the new guidance implies that “we could start raising rates before we start averaging 2%. It’s still — we need to discuss that.”

Meanwhile, Richmond President Thomas Barkin said the new guidance meant “a low level of unemployment alone would not lead to proactive increases in interest rates.”

— With assistance by Rich Miller, and Matthew Boesler

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