Former Fed Vice Chairman Richard Clarida said the Fed would need to raise short-term interest rates to at least 3.5% to rein in soaring inflation. “A rapid 'raise to neutral' in interest rates in this economic cycle is not enough to bring inflation back to the long-term target of 2% at the expected level,” he said. “I think the funds rate will eventually need to be raised to a tight range,” he said. At least one percentage point above the nominal neutral rate of 2.5%.”
The Fed on Wednesday raised its target range for the federal funds rate by 50 basis points to 0.5%-0.75%, and said it was likely to continue raising rates. It also announced a plan to shrink its massive balance sheet starting next month.
Clarida, who left the Fed in January, said his former colleague might not have to raise rates as he suggested if the shrinking balance sheet had a much bigger impact on financial conditions than currently envisaged.
The Fed will begin reducing its holdings of U.S. Treasuries and mortgage-backed securities by a total of $47.5 billion a month starting June 1, and a further $95 billion in three months.
Conversely, policymakers may have to raise interest rates further if inflation does not fall as much as they expect, Clarida noted.
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