US May See Full Employment by End of 2022 as Precondition for Interest Rate Hike, Clarida Says

© REUTERS / ANDREW KELLYSignage for a job fair is seen on 5th Avenue after the release of the jobs report in Manhattan, New York City, U.S., September 3, 2021.
Signage for a job fair is seen on 5th Avenue after the release of the jobs report in Manhattan, New York City, U.S., September 3, 2021.  - Sputnik International, 1920, 08.11.2021
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WASHINGTON (Sputnik) - The United States may see "full employment," or a jobless rate of 4% or less, by the end of next year, satisfying one of the Federal Reserve’s main conditions for a post-pandemic interest rate hike, Vice Chairman Richard Clarida said on Monday.
"My expectation today is that the labor market by the end of 2022 will have reached my assessment of maximum employment if the unemployment rate has declined by then to the SEP [Summary of Economic Projections] median of modal projections of 3.8 percent," Clarida said in a speech prepared for delivery at a Federal Reserve conference on monetary policy.
In September, the Federal Reserve predicted that real US gross domestic product growth will have returned to its pre-coronavirus growth trajectory by the fourth quarter of 2021, in what would be one of the most rapid economic recoveries in 50 years.
US interest rates have been held at between zero and 0.25% by the Federal Reserve since the first major outbreak of the novel coronavirus in March 2020.
The US economy shrank by 3.5% for all of 2020 due to shutdowns and other disruptions caused by the COVID-19 crisis. Growth this year has been spotty, with an annualized 3.5% expansion in the first quarter, 3.6% in the second and 2% in the third.
The Federal Reserve also has faced three other problems. The first is inflation as wages and the prices of almost everything have soared from the lows of the coronavirus pandemic. The second is slower-than-expected employment growth, with at least 5 million of the about 21 million jobs lost last year not having returned due to conditions forced by the pandemic. The third is the continuous disruption in supply chains as world output of key components, such as microchips, continues to face challenges.
Federal Reserve Chairman Jerome Powell said last week the central bank will be patient with a rate hike to fulfil its long-term inflation and employment targets. Inflation is trending at around 4% per year compared with the Fed’s long-term target of 2% per year. The unemployment rate stood at 4.6% at the end of October, versus the desired goal of 4% or less.
"As I have noted before, there is no doubt that it is taking much longer to fully reopen a $20 trillion economy than it did to shut it down," Clarida said in his speech. "Although in a number of sectors of the economy the imbalances between demand and supply - including labor supply - are substantial, I do continue to judge that these imbalances are likely to dissipate over time as the labor market and global supply chains eventually adjust and, importantly, do so without putting persistent upward pressure on price inflation and wage gains adjusted for productivity."
Clarida noted while the Federal Reserve was clearly "a ways away" from considering higher interest rates, it was accelerating toward the target.
"If the outlooks for inflation and unemployment I summarized a moment ago turn out to be the actual outcomes realized over the forecast horizon, then I believe that these three necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022," he added.
The Federal Reserve announced in March that it has targeted a 6.5% economic expansion for all of 2021 and has not officially changed the projection despite uneven growth in the last two quarters.
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