His comments are a clear indication that the Federal Reserve is gradually preparing to take further measures to curb inflation and normalize monetary policy. He announced last week that he would begin to restrict monthly bond purchases.
“Although we are still far from contemplating a rate hike,” Clarida said the conditions for a key rate hike are likely to be met by the end of 2022.
The Federal Reserve cut its key interest rate to zero in March 2020 to help mitigate the economic consequences of the pandemic. He then launched massive monthly bond purchases to maintain favorable lending terms for businesses and households.
The economic recovery from the coronation crisis boosted consumer prices which rose sharply. The reason was high demand and problems and inefficiencies within supply chains. This has raised concerns about accelerating inflation and aggressive monetary tightening next year.
Speaking at the Brookings Institution, Clarida said he does not expect the pressure on prices and wages to continue. However, he acknowledged that there was a risk of further accelerated inflation and that supply chain disruptions and labor shortages were serious. However, he said, imbalances will narrow over time and global supply chains and the labor market will eventually adjust without sustained price pressure.
According to Clarid, the Fed expects inflation to slow next year to nearly 2% from 3.7% this year.
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