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Due, in large measure, to this year’s significant federal stimulus spending, the U.S. economic recovery is progressing well enough that the Federal Reserve should be able to consider raising its key interest rate from near zero early in 2023, Richard Clarida, Fed vice-chair, said in a 4 August speech.
Current projections for employment and inflation indicate that “commencing policy normalization in 2023 would be entirely consistent with our new flexible average inflation targeting framework,” he said.
Instead of maintaining an inflation target of 2 percent, the Fed now seeks an average inflation rate of 2 percent over the long term, in part to make up for large parts of 2020 when the rate was well below that target.
The Fed adjusted its policy to adapt to a chaotic economic recovery in which prices are surging because of supply-line disruptions, the endings of which are unpredictable.
The current environment has complicated the Fed’s task of not only predicting inflation but also reacting to it, the Wall Street Journal noted.
However, if his projections are correct, the Fed’s conditions for raising rates “will have been met by year-end 2022,” Clarida said.
TREND FORECAST: Fed officials have gradually been reeling back their predicted date for a rate increase from 2024 to 2023; some have argued that a hike will be necessary next year.
The Fed is gently informing markets that a rate increase is coming sooner than they had previously been led to believe.
If the jobs market maintains the strength it showed in June and July (see related story) and there is no Black Swan event, the Fed will raise rates next year, not in 2023.
However, with the new rounds of selling fear of the Delta variant and new restrictions imposed by governments and businesses to fight it, we forecast an economic slowdown.
Where the economy is going and how deep it falls depends on the degree mandates are imposed upon the public to fight THE COVID WAR.2.0. The greater the draconian, the deeper the economy will fall. And as long as the economy stays weak, interest rates will stay low.