‘US may be ready for rate hike by end of 2022’

The US economy may be ready for the Federal Reserve to raise its benchmark borrowing rate by the end of next year, the central bank’s Vice Chair Richard Clarida said on Monday.

The comments were the clearest signal yet that the US central bank is preparing the way for further steps to contain inflation and normalise monetary policy after last week announcing it would begin cutting back its pandemic stimulus.

“While we are clearly a ways away from considering raising interest rates,” Clarida said he believes the “necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022.”

The Fed slashed the rate to zero in March 2020 to help contain the economic crisis caused by the pandemic and then began massive monthly bond purchases to keep credit flowing to businesses and households.

Prices have risen as the economy recovered, caused by high demand, transportation bottlenecks and shortages of both components and workers, creating concerns that inflation will accelerate and the Fed would have to hike rates more aggressively next year.

In his speech to the Brookings Institution, Clarida said he did not expect current supply chain snarls to last or put persistent pressure on inflation or wages.

He acknowledged upside risks to inflation and said the disruptions have been “substantial,” but the “imbalances are likely to dissipate over time as the labour market and global supply chains eventually adjust and, importantly, do so without putting persistent upward pressure on price inflation and wage gains.”

Clarida said the Fed forecasts that a key inflation measure is expected to fall to just over two percent next year from 3.7 percent this year.

The economy is also expected to recover the more than four million jobs still missing from before the pandemic, taking unemployment down to 3.8 percent by the end of 2022 from 4.6 percent last month. (AFP)