WASHINGTON, D.C.: Federal Reserve Vice Chairman Stanley Fischer warned on Saturday (Sunday in Manila) that the US central bank will not wait for inflation to hit two percent before raising interest rates.
In a speech at a conference on monetary policy in Jackson Hole, Wyoming, the Fed’s number two said: “We should not wait until inflation is back to two percent to begin tightening.”
He added, however, that the Fed needed to “consider the overall state of the US economy as well as the influence of foreign economies on the US economy as we reach our judgment on whether and how to change monetary policy.”
Fischer said he was confident that US inflation was on track to meet the two percent target that the Fed considers a sign of a healthy economy, even though changes in the personal consumption expenditure index “have recently been only above zero” due to temporary factors like declining oil prices.
According to the PCE index, consumer prices currently are only up 0.3 percent over the past year, notably because of low oil prices but also because of easing demand in China and elsewhere.
The Fed’s projections put core inflation, excluding oil and food prices, at between 1.6 and 1.9 percent next year, rising from 1.2 percent in July.
Among the factors keeping inflation low, Fischer cited the 17 percent increase in the value of the US dollar since last summer which has lowered prices of imports.
He added it was “plausible to think that the rise in the dollar over the past year would restrain growth of real GDP through 2016 and perhaps into 2017 as well.”
Evoking the impact of the foreign economic situation on US growth, Fischer explicitly mentioned China, departing from the Fed Open Market Committee’s usual language making oblique reference to “international developments.”
“At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual,” Fischer said.
The Fed’s Open Market Committee is scheduled to meet September 16 and 17 and most economists believe that it will begin to raise interest rates, which have been at near zero since the 2008 financial crisis.
But turbulence in the financial markets in recent weeks in the wake of the slowing of the Chinese economy has raised doubts about the timing of such a move.