Fed’s Fischer Says Economy May Merit Liftoff Later This Year

  • Job market's overall prospects remain good, Fischer says
  • Fischer doesn't anticipate global outlook derailing policy

Federal Reserve Vice Chairman Stanley Fischer said the U.S. economy may be strong enough to merit an interest-rate increase by year end, while cautioning that policy makers are monitoring slower domestic job growth and international developments in deciding the precise timing of liftoff.

At the Federal Open Market Committee’s meeting in September, “most participants, myself included, anticipated that achieving these conditions would entail an initial increase in the federal funds rate later this year,” Fischer said Sunday in Lima, where attended the annual meeting of the International Monetary Fund.

“Of course, that assessment was premised on the assumption of continued solid economic growth and further improvement in the labor market, which are key factors supporting our expectation that inflation will rise to our 2 percent objective,” he said in prepared remarks released by the Fed.

Fischer was addressing a banking seminar in the Peruvian capital as the International Monetary Fund wrapped up its annual meeting, which Chair Janet Yellen also attended. Emerging-market officials from Indonesia to South Africa are concerned about the spillover effects of higher U.S. interest rates. Joyce Chang, JPMorgan Chase & Co.’s global head of research, said in an interview in Lima that the Fed “should get it over with’’ to help reduce uncertainty.

While Fischer acknowledged the need for more clarity, he said the Fed has to “remain cognizant of the risks ahead.”

“We remain committed to communicating our intentions as clearly as possible -- but not more clearly than the facts warrant -- to assist market participants,’’ he said.

Fischer explained that the U.S. unemployment rate, which currently sits at 5.1 percent, doesn’t fully capture "additional forms of slack in the labor market," Fischer said. He noted the labor-force participation rate remains below trend, and an unusually large number of people who want full-time jobs are working part time.

While the last two payroll reports have been "disappointing," the job market’s prospects for further improvement "look good overall," he said.

Inflation Outlook

Fischer, 71, said he anticipates that inflation will likely move back toward the Fed’s 2 percent target "as the transitory effects of oil prices and the dollar fade."

Fed officials last month opted to leave their benchmark interest rate near zero, where it’s been for nearly a decade. Minutes of the Sept. 16-17 FOMC meeting, released Thursday in Washington, showed policy makers felt China’s slowdown raised risks to their outlook for growth and inflation in the U.S.

Fischer said the focus in recent FOMC statements on foreign developments is natural, given the "increasing influence of foreign economic developments on the United States economy, both through imports and exports, and through capital account developments."

"Nonetheless, we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy," he said.

Weaker Hiring

The minutes, along with a disappointing employment report for September, weakened confidence among economists and investors that the Fed will raise rates this year. U.S. employers added 142,000 new jobs in September, which was below the lowest forecast of economists surveyed by Bloomberg.

Since the Oct. 3 jobs report, several FOMC members have said they still see a rate hike as appropriate this year. They included New York Fed President William C. Dudley, Atlanta chief Dennis Lockhart and San Francisco’s John Williams, all of whom vote this year on the committee. Richmond Fed President Jeffrey Lacker, another 2015 voter, dissented at the September session, saying the panel should have raised the fed funds target range by 0.25 percent.

The FOMC is scheduled to meet twice more in 2015, on Oct. 27-28 and Dec. 15-16.

U.S. inflation has run below the Fed’s 2 percent target for more than three years. The central bank’s preferred measure of price pressures rose just 0.3 percent in the 12 months through August, held down by oil and a strengthened dollar, which makes imports cheaper.

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