Federal Reserve Vice Chairman Stanley Fischer said policy makers will consider global growth as they begin to raise interest rates, and that they could increase borrowing costs more gradually should the world economy falter.
“If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” Fischer said in a speech Tuesday at Tel Aviv University. His prepared comments were similar to remarks he delivered in October.
The Fed will weigh how raising rates will affect other nations, said Fischer, a former governor of the Bank of Israel. While tightening will probably will cause spillovers, the Fed is working to communicate policy changes clearly to smooth the transition, and emerging market economies are in better shape to endure the shift than in recent years, he said.
Fed policy makers preparing to raise rates that they’ve held near zero since December 2008 are working to engineer a smooth tightening and avoid the volatility spurred by the so-called “taper tantrum” that roiled global markets in 2013.
“The actual raising of policy rates could trigger further bouts of volatility, but my best estimate is that the normalization of our policy should prove manageable” for developing nations, Fischer said. “We have done everything we can, within the limits of forecast uncertainty, to prepare market participants for what lies ahead.”
Fischer on Monday emphasized that monetary policy in the U.S. will still be accommodative even after tightening begins.
“So much importance is given to first move and it’s misleading,” he said in Herzliya, Israel. The Fed’s first rate increase will be a matter of “going from an ultra-expansionary monetary policy to an extremely expansionary monetary policy.”
Chair Janet Yellen said last week that a first-quarter slowdown in the U.S. won’t deter the Fed from its plan to raise rates this year, and that the subsequent pace of tightening will be gradual.
Echoing the Fed’s April statement, Yellen said she expects the economy to return to a “moderate” pace of growth as headwinds, including a cooling global economy, gradually abate.
While the Fed’s mandate from Congress charges it with fostering full employment and stable prices in the U.S., Fischer said avoiding global market gyrations will be a big part of the job, because such disruptions can feed back into the domestic economy and undermine the central bank’s policy goals.
“The state of the U.S. economy is significantly affected by the state of the world economy,” Fischer said.
International Monetary Fund Managing Director Christine Lagarde has said the world could be in for a “bumpy ride” when the Fed starts raising interest rates, with overpriced markets and emerging economies likely to take the biggest hits.
The taper tantrum followed then-Chairman Ben S. Bernanke’s May 2013 testimony to lawmakers that the central bank could reduce bond purchases within “the next few meetings.” Currencies and stocks plunged in emerging markets from Turkey to Indonesia, while government bond yields soared across developing economies.
The Fed didn’t end up tapering purchases for another seven months. When it did make the first reduction in bond buying, “there was little reaction from markets,” Fischer said.
The Fed made the last cut to its bond buying in October. Emerging markets have mostly weathered that wind-down “reasonably well so far,” Fischer said.
Fischer, 71, joined the Fed a year ago. He led the Israeli central bank from 2005 to 2013 and before that was a vice chairman of Citigroup Inc. He was the International Monetary Fund’s No. 2 official from 1994 to 2001 and the World Bank’s chief economist from 1988 to 1990.