Fed No. 2 Says "Conditions Met for 2023 Interest Rate Hike"

Inflation and Price Control Targets Expected to Be Exceeded Next Year
US Employment Weak, Service Sector Strong
Focus on This Week's Labor Department Employment Data Release

Richard Clarida, Vice Chairman of the Fed [Photo by Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] The Vice Chairman of the Federal Reserve (Fed) has signaled the possibility of an interest rate hike in early 2023. Amid mixed signals from the U.S. economic indicators released that day, the employment data scheduled to be announced by the Labor Department on the 6th is expected to provide guidance on the Fed's monetary policy direction.

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

He drew a line under the idea of an immediate rate hike, stating that while a rate increase is not currently under consideration, if inflation expectations materialize, "I believe the necessary conditions for a rate hike will be met by the end of 2022."

This means that if the inflation rate exceeds 2% until next year, the average inflation targeting system manages inflation so that even if inflation temporarily exceeds 2%, it averages out to 2% over time.

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 that if the core PCE reaches 3% or higher, it would be "much higher than a mild overshoot." The core PCE is the Fed's most preferred inflation gauge.

Vice Chairman Clarida forecasted that inflation will decline next year but still slightly exceed the Fed's target of 2%.

The Wall Street Journal (WSJ) assessed that although Clarida's term ends next year and he may not influence rate decisions, his views are likely to gain consensus within the Fed.

The Fed officials' dot plot released in June also predicted two rate hikes by 2023.

WSJ explained that Clarida provided detailed information on the timing, reasons, and conditions for rate hikes, which the dot plot did not clarify.

Clarida said Fed officials have discussed tapering and expect to announce it later this year.

Employment Recovery Sluggish, Service Sector Booming

The economic indicators released that day showed sluggish employment recovery and strong service sector performance, highlighting the uncertainty of the U.S. economic outlook.

Private employment data firm ADP announced that private employment increased by 330,000 last month. This was less than half of the market expectation of 695,000 and significantly lower than the previous month's 680,000 increase.

It was interpreted that shortages of labor, raw materials, and supply chain bottlenecks limited job growth. Despite 9.5 million people being unemployed compared to pre-COVID-19 levels, U.S. companies are struggling to expand employment.

ADP's private employment statistics were seen as a preview that the weekly initial jobless claims to be released the next day and the Labor Department's July employment data on the 6th may not be positive.

The Fed has set employment market recovery as a condition for implementing tapering. Fed Chair Jerome Powell said employment data must be confirmed before deciding on tapering. Fed Governor Christopher Waller also indicated that if employment increases by more than 800,000 in August and September, tapering could begin in October.

The market expects July employment to have increased by 880,000. If July employment falls significantly short of 800,000, the possibility of tapering within the year may decrease. The recent spread of the Delta variant of COVID-19 is also a factor that could limit employment growth.

On the other hand, the ISM Services Purchasing Managers' Index (PMI) recorded an all-time high of 64.1, far exceeding the expected 60.5.

Despite employment stagnation amid the spread of the Delta COVID-19 variant, supply chain disruptions, and labor shortages, the service sector, which accounts for two-thirds of the U.S. economy, continued to grow, easing concerns about economic growth.

On that day, the U.S. 10-year Treasury yield fell to its lowest level since February due to disappointment over weak employment but rebounded after the ISM Services PMI announcement, settling at a level similar to the previous day at 1.175%.

This content was produced with the assistance of AI translation services.