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05 Aug 2021
2 min read

Interest-Rate Hike Could Materialize by Early 2023, the Fed Says

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Key Takeaways

  • Fed Vice Chairman Richard Clarida says interest rates could be increased by early 2023
  • Wall Street stock futures float above the flat line in pre-market action on Thursday

Interest-Rate Hike Could Materialize by Early 2023

Federal Reserve Vice Chairman Richard Clarida said on Wednesday that as soon as the economy met the central bank’s expectations, Fed officials could start raising interest rates. Mr. Clarida became the first highest-ranking Fed official to lay out a possible timeline for a rate hike as he believed the economy would recover enough by early 2023 when the Fed could alter its policy.

The statement by the interest-rate setter and a member of the policy-setting committee was accompanied by comments on inflation, the labor market, and tapering. Mr. Clarida said he expected inflation to decline as soon as next year but remain above the Fed’s 2% inflation goal. He also said he projected unemployment to drop further to Fed’s maximum employment goal.

“I believe that these three necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022,” the Fed Vice Chair said.

Mr. Clarida addressed unemployment by saying he expected the jobless rate to reach 3.8% by the end of next year. That number would “have reached my assessment of maximum employment”, he added. Presently, the unemployment rate stands at 5.9%, way below the nearly 15% unemployment for April 2020 when the pandemic hit. However, there are still more than 7.5 million fewer Americans employed than pre-pandemic labor market conditions.

“Commencing policy normalization in 2023 would, under these conditions, be entirely consistent with our new flexible average inflation targeting framework,” Mr. Clarida said.

US: Delta Cases Continue to Increase

While rate increases are now largely expected to commence by 2023, the Federal Reserve is still tight-lipped about the timing of reducing its asset purchases. Fed officials have signaled in previous meetings they have begun discussing tapering their $120bn a month in bond purchases. Scaling down the bountiful monetary stimulus, according to Mr. Clarida, is a subject of further discussion.

“In coming meetings, the committee will again assess the economy’s progress toward our goals,” Mr. Clarida said. “As we have said, we will provide advance notice before making any changes to our purchases,” he added, suggesting that there would be no changes to monetary policy at the Federal Open Market Committee meeting in September.

Meanwhile, stocks on Wall Street faltered on Wednesday as investors increased their concerns the economic recovery could slow down. The latest ADP report showed private-sector jobs grew by 330,000 in July, falling short of the expected 653,000.

A considerable increase in Delta virus cases in areas with low vaccination rates is stoking fears the pandemic is still not over despite 50% of Americans now fully vaccinated. The US reported 112,270 new cases for Wednesday, bringing the seven-day average to 96,036 cases a day.

Against that backdrop, the Dow Jones Industrial Average declined 323.73 points, or 0.92%, on Wednesday, finishing the session at 34,792.67. The broad-based S&P500 slipped 20.49 points, or 0.46%, to 4,402.66. The tech-focused Nasdaq Composite climbed moderately by 19.24 points, or 0.13%, to a close of 14,780.53.

Equity index futures on Thursday imply a positive open. All three major benchmarks are hovering slightly in the green in pre-market trading.

Bourses in Europe today opened flat as investors maintained the strong upside momentum from yesterday. On Wednesday, the pan-European Stoxx 600 rallied to a record close of 468.22 points.

Digital assets on Thursday trade subdued as crypto market participants expect to see the roll-out of the major Ethereum network upgrade. The improvement, called London, is slated to occur today. Bitcoin is gravitating around $39,500, while ether is flat on the day, trading sideways near $2,700.

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