Federal Reserve Vice Chairman Stanley Fischer said raising interest rates from near zero “likely will be warranted before the end of the year” and subsequent increases probably won’t be uniform or predictable.
“A smooth path upward in the federal funds rate will almost certainly not be realized” as the economy encounters shocks such as the surprise plunge in oil prices, Fischer, said on Monday in remarks to the Economic Club of New York.
Officials last week opened the door to a rate increase as soon as June, while also indicating in their forecasts they will go slow once they get started. Fischer’s comments are the first from Fed leadership since Chair Janet Yellen’s press conference after the Federal Open Market Committee meeting on Wednesday.
The Fed wants to be “reasonably confident” inflation is rising toward its 2 percent goal before moving. A stronger dollar could interfere by holding down import prices. Fischer, however, was unfazed by the strength of the dollar, which has advanced almost 5 percent this year on the Bloomberg Dollar Spot index. He argued that its rise reflected the performance of the U.S. economy and central bank bond buying in Europe and Japan, which will also benefit U.S. growth.
“What is not acceptable is manipulating exchange rates -- purely exchange rates -- trying to use that as the sole means of generating growth,” Fischer told the audience. “That has not happened as far as we can tell in our partner countries.”
The dollar dropped against all its 16 major peers except the pound on Fischer’s comments on rate-increase timing, which he left vague and stressed would be data-dependent.
“Whether it’s going to be June or September, or some later date, or some date in between, will depend on the data,” said Fischer, although he said labor market readings would be an important guide. The March payrolls report is due on April 3.
“We’ve got two very positive numbers for the first quarter of 2015 and we’re waiting for another one,” said Fischer, 71, the former Bank of Israel governor who joined the Fed in May. U.S. employers added 534,000 new jobs in the first two months of 2015 and the jobless rate fell to 5.5 percent in February.
Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago, said the remarks indicate the Fed has not made up its mind on when to move rates, held near zero since December 2008.
“It’s very clear from Stan’s view they don’t know exactly when they’re going to raise rates,” she said in a Bloomberg Radio interview. “There’s a growing divide within the Fed now of those people who think we have passed full employment, we don’t need further labor market improvement, and the core of the Fed that still believes we need more improvement.”
A June rate increase remains a possibility, Cleveland Fed President Loretta Mester said in an interview on Bloomberg Television in Paris on Monday.
Mester, who votes on the FOMC next year, said the current weakness in the economy is “transitory” and she’s “more optimistic” about the outlook.
“The headwinds we have been suffering through are abating, financially both consumers and business balance sheets look good, banks are recapitalized,” she said. “So I see some strength.”
Fischer stressed that even after the Fed has begun to tighten, central bank policy will still support U.S. growth.
“There is one point which is critical to understand,” Fischer said. “When we raise the interest rates which we will probably do one day, from zero to 25, from 25 to 50 basis points, we will be moving from an ultra-expansionary monetary policy to an extremely expansionary monetary policy.”
Fischer also said that while forward guidance on rates remains important, its role may diminish.
“It is likely that explicit long-term forward guidance will play less of a role in monetary policy after liftoff than it has during the past few years,” he said. “As monetary policy is normalized, interest rates will sometimes have to be increased, and sometimes decreased.”
After the first increase, Fischer said there’s no plan for the FOMC to follow a “steady rate of increase from zero to the longer-run normal nominal federal funds rate,” as it did a decade ago, or to raise rates by 25 basis points every meeting, or every second or third gathering.
Fischer said last month the central bank looked most likely to raise rates in June or September, although economic developments might warrant different timing for liftoff. Since 2008, the Fed has held rates near zero and more than quadrupled its assets to $4.5 trillion in three rounds of bond buying.