"Expeditiously 'getting to neutral' will not be enough this cycle"
The Federal Reserve will need to raise short-term interest rates to at least 3.5% to bring surging inflation under control, former vice chairman Richard Clarida said.
“Expeditiously ‘getting to neutral’ will not be enough this cycle to return inflation over the forecast horizon back to the 2% longer-run goal,” he said in remarks prepared for delivery to a Hoover Institution conference on Friday. “The funds rate will I believe ultimately need to be raised well into restrictive territory, by at least a percentage point above the estimated nominal neutral rate of 2.5%.”
The Fed on Wednesday raised it target range for the federal funds rate by a half percentage point, to 0.5% to 0.75%, and said ongoing increases were likely. It also announced a plan to start reducing its big balance sheet next month.
Clarida, who left the Fed in January, said his former colleagues might not have to raise rates as high as he suggested if the balance-sheet rundown has a substantially bigger impact on financial conditions than currently envisaged.
The Fed will begin shrinking its holdings of Treasuries and mortgage-backed securities from June 01 at a combined monthly pace of $47.5 billion, stepping up after three months to $95 billion.
Conversely, policy makers might have to raise more if inflation does not fall as much as they’ve projected, the Columbia University professor said.