Interest-Rate Rises Could Come as Soon as Early ’23, Fed’s Clarida Says

Even though Mr. Clarida isn’t likely to be at the Fed at that time—his term on the board expires at the end of January—his comments are notable because his views are likely shared by a number of other Fed officials and because of his role in shaping the central bank’s current policy guidance.

Mr. Clarida was a leading architect of the Fed’s new policy framework unveiled one year ago by Fed Chairman Jerome Powell. That framework calls for the central bank to seek periods of inflation moderately above its 2% goal to make up for past misses of the target.

The Fed’s framework wasn’t designed for an environment like the current one, where prices are surging due to bottlenecks and supply shortages associated with reopening the economy from the Covid-19 pandemic. That has complicated the Fed’s task of not only forecasting inflation but also of clarifying how it plans to react to incoming data about economic growth, unemployment and inflation.

In September 2020, the Fed said that so long as consumers’ and businesses’ expectations of future inflation remains stable, it will hold interest rates near zero until inflation is “on track to moderately exceed 2% for some time” and until the labor market reaches conditions associated with maximum employment.

Mr. Clarida prefaced his remarks by saying that interest rate increase are “certainly not something on the radar screen right now,” but he said that if his outlook for inflation and unemployment is realized, then the Fed’s thresholds for raising rates “will have been met by year-end 2022.”

At their meeting in June, 13 of 18 Fed officials projected they would raise interest rates from near zero by 2023, with most expecting to raise their benchmark rate by 0.5 percentage point. Seven expected to raise rates next year. In March, most officials expected to hold rates steady through 2023.

Those projections aren’t a product of committee debate, and they can at times provide an incomplete picture of where the center of gravity sits on the rate-setting committee. Mr. Clarida’s comments provided greater detail around those projections by explaining the conditions and analysis behind when and why rate increases might be appropriate.

The Fed cut interest rates to near zero in March 2020, and it has been purchasing $120 billion a month in Treasury and mortgage securities to provide additional stimulus to the economy. Officials debated last month how and when to begin shrinking the pace of those purchases, and Mr. Clarida said Wednesday he could see the central bank announcing a reduction in the pace of purchases later this year.

The Fed’s new framework is aimed at addressing the problem the central bank faces of having less room to stimulate the economy once interest rates are lowered to zero, sometimes called the “effective lower bound” or “ELB.” In his speech, Mr. Clarida pointed to a burst of fiscal stimulus this year—something many forecasters at the Fed didn’t incorporate when they unveiled their interest-rate guidance in the second half of 2020.

“It is important to note that while the ELB can be a constraint on monetary policy, the ELB is not a constraint on fiscal policy, and appropriate monetary policy under our new framework, to me, must—and certainly can—incorporate this reality,” he said. Mr. Clarida said fiscal policy this year, including more than $2 trillion in excess savings that haven’t been spent by households, “can fully offset this constraint.”

Inflation has accelerated this year as the economy faces supply-chain bottlenecks and materials shortages. The Fed’s preferred inflation gauge, excluding volatile food and energy categories, rose 3.5% in June from a year earlier, compared with a 3.4% year increase in May.

Mr. Clarida said he expects inflation to decline next year, but that he expects it will still continue to run somewhat above the Fed’s 2% goal.

“I do continue to judge that these imbalances are likely to dissipate over time as the labor market and global supply chains eventually adjust and, importantly, do so without putting persistent upward pressure on price inflation, wage gains adjusted for productivity, and the 2% longer-run inflation objective,” he said. Mr. Clarida said he thinks the risks of inflation running higher than he currently expects are greater than the risks of inflation running lower than his forecast.

Write to Nick Timiraos at [email protected]

Corrections & Amplifications
Federal Reserve Vice Chairman Richard Clarida spoke on the interest rate outlook on Wednesday. An earlier version of this story incorrectly said he spoke Tuesday. (Corrected on Aug. 4, 2021)