Several Federal Reserve officials on Monday indicated the central bank could raise U.S. interest rates by the end of 2022 based on the rapid recovery of the economy and an extended bout of high inflation.
The Fed leadership has been split on whether the first rate hike since the onset of the pandemic would take place in late 2022 or early 2023. Yet Wall Street
has increasingly come to think the Fed will act sooner and top Fed officials also seem more receptive.
Federal Reserve Vice Chairman Richard Clarida on Monday repeated his view that the criteria for a rate hike could be met before the end of 2022.
Clarida is seen as close to Chairman Jerome Powell. His comments could be viewed as a sign the top Fed brass might be more open to raising rates sooner than it had planned because of the spike in inflation.
Prices have risen 4.4% in the past year using the Fed’s preferred PCE inflation gauge and an even higher 5.4% based on the better-known consumer price index.
Clarid acknowledged the increase in inflation this year was more than a “moderate overshoot” of the Fed’s 2% average target. And he stressed the Fed is watching closely.
“I would not consider a repeat performance next year a policy success,” he said.
Yet Clarida stuck to the view, echoed by Powell, that inflation will slow sharply in 2022 to around 2.25% as labor shortages and supply bottlenecks ease.
“Most of the inflation will prove to be transitory,” Clarida said in a panel sponsored by the Brookings Institution.
St. Louis Federal Reserve Bank President James Bullard was more blunt. In an interview with Fox Business, he said he expects the central bank to raise interest rates twice in 2022.
Bullard also said he thinks the Fed could speed up tapering plans.
Bullard said ongoing supply bottlenecks and “one of the hottest labor markets” since World War Two could keep inflation high through 2022. He predicts the unemployment rate will drop to the 3% range by next year.
If that turns out to be the case, he said, the Fed could finish tapering before next June as now planned.
“We have quite a bit of inflation,” Bullard said.
The Fed last week announced it would begin to taper, or phase out, its massive purchases of U.S. Treasurys and mortgage-backed securities starting this month. The central bank has been buying $120 billion a month in securities as part of an effort to keep U.S. interest rates low
“We have done a lot to move Fed policy in a more hawkish direction,” said Bullard, himself one of the more hawkish members of the central bank’s leadership.
Bullard will be a voting member of the bank’s interest-rate-setting Federal Open Market Committee in 2022.
While the bond purchases helped the economy recover, some Fed critics also contend it’s contributed to the increase in inflation. The U.S. has recovered so rapidly and is growing so strongly that shortages have developed across the economy. These shortages have spawned the big surge in inflation.
Bullard has pegged in two interest rate increases before the end of 2022, but half of his colleagues still don’t expect the first rate hike until 2023, based on the most recent forecast in the FOMC “dot plot.”
Patrick Harker, president of the Philadelphia Federal Reserve, also said in a speech later on Monday that the Fed might have to act before 2023 if inflation does not ease.
Like Clarida, he predicts price pressures will wane next year, “but we are monitoring inflation very closely and are prepared to take action.” Harker is not a voting member of the FOMC this year or next.