Top Fed official says continued high inflation would be problematic for central bank

Those imbalances should dissipate “without putting persistent upward pressure on price inflation and wage gains adjusted for productivity,” said Fed Vice Chairman Richard Clarida in remarks prepared for delivery on Monday morning.

At the same time, Mr. Clarida said the rise in inflation this year—which increased 4.4% from a year earlier in September, according to the Fed’s preferred gauge—was much more than officials’ desired “moderate overshoot” of the central bank’s 2% inflation goal.

“I would not consider a repeat performance next year a policy success,” said Mr. Clarida. The Fed official said most of his colleagues who participate in rate-setting meetings believe the risks right now are tilted to higher-than-anticipated inflation outcomes.

Mr. Clarida repeated his earlier view that economic conditions could justify an increase in interest rates by the end of 2022. He said projections released after the Fed’s September meeting, in which most officials saw rates continuing to rise steadily in 2023 and 2024, were consistent with his own view of how the Fed should be setting policy under a new framework it adopted last year.

That framework called for the Fed to seek periods in which inflation should run slightly above the central bank’s 2% goal to make up for longer periods in which it had run below the goal. But officials didn’t bargain for the sharp rise in prices this year unleashed by pent-up demand as the economy reopened, snarling global supply chains, when they formally adopted the policy in August 2020.

The new framework was left deliberately ambiguous by Fed officials over just what magnitude of inflation overshoot officials desired, which has led to differing interpretations by bond investors and other close observers of the central bank over just what level of inflation the Fed would desire going forward.

Mr. Clarida has been a key architect of the framework, making his speeches closely watched for signs of how the central bank might be interpreting its objectives. His remarks on Monday suggested he believes the Fed will have soon satisfied its goal of letting inflation run above 2% in a bid to prevent consumers’ and households’ expectations of future inflation from drifting too low.

The Fed revamped its framework in part due to concerns that the prevalence of the so-called zero bound, in which interest rates are cut to zero and the Fed can’t further provide conventional stimulus by lowering rates, could hobble policy makers in the future.

But Mr. Clarida observed that such constraints were less relevant when government spending policies aggressively boosted demand, as has been the case over the past year. One implication is that the Fed may also see less reason to seek inflation that runs above its 2% target.

This story has been published from a wire agency feed without modifications to the text