The remarks made this week by two recent Fed vice presidents, Richard Clarida, who until January was one of Jerome Powell’s chief aides to monetary policy, and Randall Quarles, who oversaw banking regulation until late last year, are part of a small choir. other former US central banks, which are now criticizing the position and direction of the Fed’s policy.
Clarida, who has now returned to academia as a professor of economics at Columbia University, said Friday that the Fed will need to raise interest rates in the “restricted area” to slow economic growth and curb economic growth. “inflation”. Quarles, who returned to the Utah-based investment company he co-founded, added earlier this week that a “recession is now likely.”
The gloomy views of former officials arise when Powell intensified the central bank’s fight against inflation, raising interest rates by half a percent and promising two more rate hikes in July. The pace of policy tightening aims to bring overnight borrowing costs “fast” to a neutral range of 2.25% -2.5% and to ensure further growth if necessary. Mr Powell said he saw a “plausible way” to cool inflation without slowing the economy.
Speaking at a conference at the Hoover Institution at Stanford University on Friday, Mr Clarida said the Fed would need to raise rates “at least” by at least 3.5% or more to return inflation to its 2% target.
“The Fed has the tools to tackle this challenge, and officials understand the challenges and are determined to succeed,” said Clarida, whose role in the Fed gives him a huge impact on politics but keeps him on the sidelines. according to Mr. Powell. “But the Fed’s tools are stupid, the mission is difficult, and difficult compromises lie ahead.”
Quarles, who was more outspoken hawk than Clarida while in the Fed, had an even sharper tongue this week.
“We’d be better off taking office in September,” he told the Banking with Interest podcast, explaining the delay, at least in part, because President Joe Biden postponed his decision to reappoint Powell for a second until November. term as chairman of the Fed.
Now that inflationary pressures are high, unemployment is low and demand far exceeds supply, the effect of a rapid rate hike is likely to be a “recession,” said Mr Quarles, appointed by Donald Trump, who resigned in December when he failed to get Biden’s second green light. term.
Neither he nor Clarida, also appointed by Trump, called for a significant rate hike before leaving the Fed.
Bill Dudley, who headed the New York Fed until 2018, also says the Fed is late with raising rates and will lead to a recession.
Powell, for his part, acknowledged that developing a soft landing for the economy would be difficult and that higher spending on the loans ahead would cause “some pain” to Americans who are already struggling with rising prices.
“But, you know, the big pain is not to fight … inflation and not let it start,” he said Wednesday.
On Friday, Mr Clarida said that last summer he had seen inflation risks “definitely increase”.
If inflation, which is now 6.6% by Fed standards, is still 3% in a year, the “simple and convincing” arithmetic of the widely cited policy leadership known as the “Taylor rule” means that rates will have to be raised to 4% , he said.
Mr. Clarida did so at a conference hosted by John Taylor of Stanford, the author of the rule. Several other economists who spoke at the conference also called for a series of larger rate hikes than the Fed is now signaling.
Two current Fed politicians, Fed Governor Christopher Waller and St. Louis Fed Chairman James Bullard, will also address the conference on Friday. Both have been pushing for faster rates for several months.
Mr Taylor presented his own paper, which states that the Fed’s key rate – which is between 0.75% and 1% since this week’s raise – should be at least 3% and possibly more than double to lower inflation. up to 2% this year.
Mr Powell said he did not expect inflation to fall so quickly, although rising rates are expected to start lowering later this year. According to him, the “soft” landing will not be easy, but the economy is “very strong and has good opportunities for tougher monetary policy.”
A report released on Friday shows that US employment growth rose more than expected in April, with a stable unemployment rate of 3.6% providing further evidence.