Fed's Fischer Says Four Rate Hikes in 2016 ‘in the Ballpark’by
Uncertainty over China `risen a bit,' but little direct impact
Fed will remain accommodative as long as inflation below 2%
Federal Reserve Vice Chairman Stanley Fischer said policy makers’ forecasts predicting four interest-rate increases in 2016 were “in the ballpark,” though China’s slowing economy and other sources of uncertainty make it difficult to predict the path of policy.
“The reason we meet eight times a year is because things happen, and as they happen you want to adjust your policy,” Fischer said in an interview Wednesday on CNBC.
Fischer’s remarks come three weeks after the Fed raised interest rates for the first time in almost a decade. Policy makers said at the time they would continue to monitor real and expected progress on inflation, which remains below their 2 percent target, as they contemplate when to raise again.
After the December meeting, the Fed also released its quarterly Summary of Economic Projections, showing Federal Open Market Committee members’ forecasts for economic conditions and the path of rates. The committee’s median estimate put the benchmark federal funds rate at the end of 2016 at 1.4 percent. That implies four additional quarter-point hikes this year.
Regarding China, Fischer said "there are levels of uncertainty and they’ve risen a bit now," while downplaying the direct effect on the U.S. economy.
“If all China’s neighbors and other large parts of the world are negatively affected to a considerable extent by China, then that would be an impact,” he said. “The rest of the world matters to us. If it was only China it would still matter, but a good deal less.”
The Standard & Poor’s 500 Index dropped 1.5 percent on Monday, the worst start to a year for U.S. stocks since 1932, after poor manufacturing news emerged from China, triggering a sell off that halted trading in Shanghai.
Turmoil caused by worries over China last year helped convince the Fed to delay a rate increase from September to December. Fischer said that made sense because the exact timing of moves are less important than the trajectory of rates over the longer term.
“From the viewpoint of what really matters, it’s what people think is going to happen over the next couple of years, and I think September was a good example of that,” he said. “We waited, looked around, saw that it hadn’t had a huge effect and made the move at the next suitable occasion.”
Fischer said he continued to expect inflation to move back toward the Fed’s 2 percent target as the price of oil and the value of the U.S. dollar stabilize. Still, he said, rates will probably remain low.
“As long as inflation is lower than the 2 percent and unemployment is somewhere around where it should be, there’ll be a force requiring us to maintain an accommodative policy,” he said.
Investors currently expect only two quarter-point increases this year, according to pricing in federal funds futures, but Fischer said that the view of the market was “too low.”
“We make our own analysis and our analysis says that the market is under-estimating where we’re going to be,” he said.
Minutes of the Dec. 15-16 FOMC meeting are scheduled to be released on Wednesday at 2 p.m. in Washington.