The Federal Reserve raised its benchmark interest rate this week by half a percentage point in an attempt to rein in historic levels of inflation, which has risen more quickly over the past year than any time in the last four decades.
The Fed is expected to raise rates even more over the next year in an attempt to cool the overheated economy. But one former Fed official says that the agency needs to do more—a lot more.
Richard Clarida, former vice chair of the Federal Reserve board of governors and professor of economics and international affairs at Columbia University, says the Fed will need to increase its interest rate to at least 3.5% over the year to bring down inflation.
“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%, for inflation to be credibly projected to return to 2%,” said Clarida on Friday, at a monetary policy conference at Stanford University’s Hoover Institution, according to a transcript reviewed by Coins2Day and previously reported by the Wall Street Journal.
Clarida said that signs from the first half of 2021 falsely assured Americans a return to the economy’s pre-pandemic potential, with inflation expectations remaining in line with the Fed’s goal of 2%.
“But in the second half of 2021, and continuing into this year, there has been a surge in inflation that has been about as bad as it gets, not only in the U.S. But in many other economies around the world,” he said.
He added that inflation has been “distressingly persistent.”
In his remarks, Clarida notes that the Fed rose to the initial unprecedented challenge that the pandemic posed.
“The pandemic and the mitigation efforts put in place to contain it in 2020 delivered the most severe blow to the U.S. Economy since the Great Depression,” he said, adding that the U.S. Economy took a major hit during the country’s initial lockdown, and when 22 million people lost their jobs by April 2020.
“Today, the Fed faces a different challenge, that of insuring that the hard won battles under Paul Volcker and Alan Greenspan to achieve price stability are not squandered,” he said, referring to two former chairs of the Fed.
In closing, Clarida said he believes in the bank’s ability to rise to the challenge:
“But the Fed’s instruments are blunt, the mission is complex, and difficult tradeoffs lie ahead,” he said.
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