Second, if this additional fiscal stimulus is enacted, the median projected policy rate will likely rise more steeply after lift-off. Note that starting at the September meeting, the projections will extend out to 2024. The year-end policy rate projection for 2024 could well be in the 2.0 to 2.5 percent range by the time of the December projections.
One important caveat: It is not clear that Powell and Clarida will be around long enough to bring about these policy outcomes. President Biden may seek to put his own stamp on the Federal Reserve, as Powell’s and Clarida’s terms in leadership positions expire next year. Still, one leading candidate to replace Powell, current Governor Lael Brainard, has largely been aligned with Powell and Clarida on monetary policy. Thus we should still expect monetary policy to lean against the next big spending package, even under new Fed leadership. FAIT may have fully accommodated the springtime American Rescue Plan, but policy makers will not sit on their hands indefinitely.
1. Richard Clarida,“Outlooks, Outcomes, and Prospects for U.S. Monetary Policy,” August 4, 2021.
2. See, for example, Richard Clarida, “The Federal Reserve’s New Framework: Context and Consequences,” January 13, 2021.
3. See Maximum Employment and the Risks of a Policy Error for more information on Clarida’s prior comments.
4. “Fed Vice Chair Richard H. Clarida on US economic outlook and monetary policy,” Peterson Institute for International Economics, August 4, 2021.
5. On labor market conditions before the pandemic, Powell stated in a February speech, “There was every reason to expect that the labor market could have strengthened even further without causing a worrisome increase in inflation were it not for the onset of the pandemic.” See “Getting Back to a Strong Labor Market,” February 10, 2021.
6. Jerome Powell, Q&A session at the Atlantic Festival, Washington, DC, October 3, 2018.
7. Richard Clarida, “Outlooks, Outcomes, and Prospects for U.S. Monetary Policy,” August 4, 2021.
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