Fed Vice Chair Clarida says another year of inflation like this one would not be 'a policy success'

Federal Reserve Vice Chairman Richard Clarida conceded Monday that inflation is running well above a level the central bank considers desirable, and if that continues it would signal a policy error.

Though Clarida still subscribes to the broader description of current price pressures as “transitory,” he said they are more intense than expected and will be higher this year than the Fed’s most recent forecast.

“Realized inflation so far this year represents to me much more than a moderate overshoot of our 2% longer-run goal, and I would certainly not consider a repeat performance a policy success,” he said during a virtual conference presented by the Brookings Institution.

The remarks come nearly a week after the Fed indicated it would keep its benchmark interest rate anchored near zero for now, but later this month will start tapering the amount of bonds it purchases each month. The move will see the Fed reduce the program by $15 billion a month for at least November and December, then will continue each month so long as economic and market conditions hold up.

Left unanswered is the question of when the Fed will hike rates.

Current Fed forecasts indicate a slightly better-than-even chance for the first increase coming in 2022. Pricing in the federal funds futures market, however, indicates the rate will rise to 0.51% by the end of the year, which would mean two quarter-percentage point increases.

Clarida said he will be watching inflation, unemployment and gross domestic product. Should they continue to improve – he projects full employment by the end of 2022 – then he expects that rate hikes will be appropriate.

“While we clearly are a ways away from considering raising interest rates, if the outlooks for inflation and unemployment … turn out to be the actual outcomes, then I do believe that these three conditions for raising the target range of the funds rate will have been met by year-end 2022,” he said.

The Brookings event focused on the framework the Fed adopted last year on inflation. Under the guidelines, the Fed is willing to tolerate a higher inflation rate than its 2% target for a period of time to promote full and inclusive employment.

Clarida said he sees the Fed’s preferred inflation gauge hitting 4% this year, higher than the 3.7% outlook the Fed’s rate-setting body pointed to in September. He then sees inflation averaging 2.5% in 2022 before fading back toward the 2% longer-run target.

Philadelphia Fed President Patrick Harker also weighed in on inflation Monday, acknowledging the impact but saying that he also expects prices to fall back.

“I am acutely aware that this period of rising prices is painful for many Americans. But I do expect inflation to moderate next year as supply chains come back online and bottlenecks ease, he told the Economic Club of New York in prepared remarks. “I don’t expect that the federal funds rate will rise before the tapering is complete, but we are monitoring inflation very closely and are prepared to take action, should circumstances warrant it.”