Ex-Fed Official Says Rates of at Least 3.5% Will Be Needed to Slow Inflation

STANFORD, Calif.—A former senior Federal Reserve official said it was likely that the central bank would need to raise its benchmark interest rate over the next year to at least 3.5% or to even higher levels that deliberately slow economic growth to bring down inflation.


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“Even under a plausible best-case scenario in which most of the inflation overshoot last year and this year turns out to have been transitory, the funds rate will, I believe, ultimately need to be raised well into restrictive territory,” said

Richard Clarida,

referring to the federal-funds rate, in remarks prepared for delivery Friday at a conference at Stanford University’s Hoover Institution.

From 2018 until this past January, Mr. Clarida served as Fed vice chairman, making him a top lieutenant to Fed Chairman

Jerome Powell.

The Fed on Wednesday raised its policy rate by a half-percentage point for the first time since 2000, to a range between 0.75% and 1%. Mr. Powell suggested the Fed is on track to raise rates by another half-percentage point in both June and July.

Mr. Clarida cited a widely used policy-setting rule suggesting that if inflation a year from now was running at 3%, the Fed would need to raise interest rates to 4% to eventually bring inflation down to the central bank’s 2% goal.

That is above the highest rate projection submitted by any of 16 Fed officials before their March 15-16 meeting.


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Mr. Clarida, who teaches economics at Columbia University, said rates would have to rise more if inflation is higher than 3% next year. On the other hand, rates might not have to rise as much if the Fed’s shrinking asset portfolio or other changes in the Treasury market send longer-term U.S. government bond yields higher than would otherwise be the case.

Mr. Clarida was heavily involved in overseeing the central bank’s revamped policy-setting framework, announced in August 2020.

The framework was designed to provide more zip to monetary policy following periods in which interest rates had been lowered to zero. It aimed to do that by pledging to seek inflation slightly above the Fed’s 2% target to make up for past misses.

Federal Reserve Chairman Jerome Powell said Wednesday the central bank approved a half-percentage-point interest-rate increase in an effort to reduce inflation that is running at a four-decade high. Photo: Win McNamee/Getty Images

Mr. Clarida said the fears that had motivated that policy shift—namely that the central bank’s tools might be less powerful once interest rates had been cut to zero—weren’t ultimately realized because of a very aggressive response from fiscal policy makers.

As a result, the Fed might not have needed to provide stimulus for as long as officials initially anticipated would be warranted in 2020, when they adopted the framework.

Write to Nick Timiraos at [email protected]

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Appeared in the May 7, 2022, print edition as ‘Ex Official Eyes Fed Rate Rise To 3.5%.’

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