Fischer Sees Little Risk of Fed Falling Behind the Curve

  • Vice chairman says FOMC decision to hold rates was ‘close’
  • ‘Conditions in the labor market are strengthening,’ he says

Federal Reserve Vice Chairman Stanley Fischer said the central bank’s decision last month to keep interest rates unchanged was a close call even has he indicated little concern policy makers were at risk of waiting too long to hike.

“Since monetary policy is only modestly accommodative, there appears little risk of falling behind the curve in the near future, and gradual increases in the federal funds rate will likely be sufficient to get monetary policy to a neutral stance over the next few years,” he said in prepared remarks for a speech on Sunday in Washington.

Fischer’s comments add to the debate among Fed officials about the timing of the next rate increase. Many economists and traders see the Fed on track to raise borrowing costs by a quarter percentage point in December, which would be its second increase in 12 months.

Policy makers left the target range for their benchmark interest rate unchanged at 0.25 percent to 0.5 percent on Sept. 21, with three members of the Federal Open Market Committee dissenting in favor of a rate increase. In his remarks to a banking seminar, Fischer characterized the hold as a “close call” given improvements in the job market and the economy more broadly.

‘Further Evidence’

“Leaving the target range for the federal funds rate unchanged did not reflect a lack of confidence in the economy,” he said. But with “scope for some further improvement in the labor market remaining, and inflation continuing to run below our 2 percent target, we chose to wait for further evidence of continued progress toward our objectives,” he said.

Cleveland Fed President Loretta Mester, one of the September dissenters, said in an interview with Bloomberg last week that, “I don’t think we’re behind the curve.” But, “we’ve learned over history that the Fed should be looking ahead and not just waiting,” she said.

Fischer, 72, said the economy is running close to full employment, and that household spending is expected to remain a driver of growth in the second half of the year. He said "unusually soft" business investments outside the energy industry bear monitoring, adding that he expects an acceleration this year as companies expand to meet growing demand.

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The vice chairman spoke two days after the Labor Department reported that U.S. employers added 156,000 people to payrolls in September, which he characterized as additional evidence of improvements. He said "transitory effects" of lower oil prices and a stronger U.S. dollar have kept inflation below the central bank target of 2 percent, adding that some inflation expectations remain low and warrant close attention.

“Conditions in the labor market are strengthening, and we expect that to continue,” Fischer said. “And while inflation remains low, we expect it to rise to our 2 percent objective over time.”

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