And Fed Vice Chairman Richard Clarida, a close ally of Powell, surprised many observers last month by suggesting that the Fed’s targets of maximum employment and annual inflation of 2% could be reached by the end of 2022 – a sign that Clarida could then support a rate hike. .
If this week’s updated forecast sees a first rate hike next year, that would mean that a rate hike would quickly follow the cut and suggest that the Fed is worried about excessive inflation. The last time the Fed started cutting its bond purchases was in December 2013, after the Great Recession. It took 10 months to reduce these purchases. The Fed then did not raise its short-term rate until more than a year later, in December 2015.
A rapid cut and rate hike in 2022 would be a more aggressive timeline than financial markets now expect.
David Wilcox, senior researcher at the Peterson Institute for International Economics and former director of research at the Fed, said that while higher inflation may persist longer than the Fed initially expected, it could still fade away at as the economy normalizes, without demanding higher interest rates.
“Holding back may be the right answer,” he said.
John Williams, chairman of the New York Fed, suggested last week that the Fed wouldn’t hike rates until it hit its maximum employment target. While the Fed hasn’t set that target, it’s likely an unemployment rate below 4%. The unemployment rate was 5.2% in August.