US Fed No. 2 Official Says "Possibility of Rate Hike in 2023" (Update)

[Asia Economy New York=Correspondent Baek Jong-min] The Vice Chairman of the U.S. Federal Reserve (Fed) has signaled the possibility of a rate hike in early 2023.

Richard Clarida, Vice Chairman of the Fed [Image source=Reuters Yonhap News]

Richard Clarida, Vice Chairman of the Fed (photo), spoke at an event hosted by the Peterson Institute for International Economics on the 4th (local time), stating, "As long as the expected inflation rate remains at the long-term target of 2%, starting monetary policy normalization in 2023 would be fully consistent with the average inflation targeting framework."

He drew a line by saying that a rate hike is not currently under consideration, but if inflation expectations materialize, "I believe the necessary conditions for a benchmark interest rate increase will be met by the end of 2022." This means that if the inflation rate exceeds 2% until next year, it satisfies the average inflation target to manage inflation at an average of 2%, thereby meeting the conditions for a rate hike.

He cited the core Personal Consumption Expenditures (PCE) price index as evidence of rising inflation. The core PCE price index in June rose by as much as 3.5% compared to the same period last year. He expressed concern, saying, "If the core PCE reaches 3% or higher, it is much greater than a 'moderate overshoot'." The core PCE is the Fed's most preferred inflation gauge.

Clarida’s remarks are not significantly different from the Fed officials’ dot plot released in June, which predicted two rate hikes by 2023, but they are seen as confirming the Fed’s commitment to tightening.

The WSJ explained that Vice Chairman Clarida provided detailed information on the timing, reasons, and conditions for rate hikes that the dot plot did not clarify. Clarida also mentioned that Fed officials have discussed tapering (reducing asset purchases) and expect to announce it later this year.

However, the weak employment recovery announced on the same day lowers the possibility of early tightening. Private employment data firm ADP reported that private employment increased by 330,000 last month. This is less than half of the market expectation of 695,000 and significantly down from the previous month’s 680,000 increase.