Former Federal Reserve Vice Chair Richard Clarida believes that another interest-rate hike this year would be a wise move by the U.S. central bank. In an interview with Bloomberg, Clarida expressed concern that prematurely declaring “mission accomplished” could lead to the need to restart rate hikes next year. He emphasized the importance of taking an additional hike this year to mitigate this risk.

Fed Chair Jerome Powell recently stated that decisions about interest rates will be made on a “meeting-by-meeting” basis. The Fed’s forecast predicts that the unemployment rate will increase to 4.5% by the end of 2024, compared to the 3.6% recorded in June. However, under the Sahm rule formulated by former top Fed staffer Claudia Sahm, a recession is indicated when the three-month moving average of the unemployment rate rises by 0.5 percentage points or more from its low over the past year.

Clarida warned of an alternative scenario where inflation picks up early next year after a period of slowdown later this year. He explained that if the Fed finds itself in March 2024 with an unemployment rate of 4% and an inflation rate of 4%, they would face a challenging situation. While it is not the base case, Clarida believes it is a risk that should be considered.

Despite these considerations, the Dow Industrial Average experienced a slight decline on Thursday, following 13 consecutive sessions of gains. Concurrently, the yield on the 10-year Treasury yield has risen to 3.97%, reaching its highest level in two weeks.

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