Former Bank of Israel Governor Stanley Fischer said he expects the Federal Reserve to reduce monetary stimulus “modestly” before Chairman Ben S. Bernanke exits in January next year.
“Interest rates shouldn’t rise too much” because the Fed will move slowly, Fischer, 69, said at a business forum in Hong Kong.
Demands for “forward guidance” from the U.S. central bank have become unrealistic, Fischer said, adding that policy makers can’t be expected to spell out actions to be taken in six months’ time.
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He was commenting five days after the Federal Open Market Committee surprised economists by refraining from paring $85 billion of monthly asset purchases as policy makers wait for more signs of labor-market gains.
Fischer, who left his role at Israel’s central bank at the end of June, was Bernanke’s thesis adviser at the Massachusetts Institute of Technology, where the Fed chairman obtained his Ph.D. in 1979. In a Bloomberg News survey of economists last week, 8 percent said Fischer should be the next Fed chairman, while a majority favored current Vice Chairman Janet Yellen.
Fischer said that investors had overreacted to Bernanke’s comments in May on the outlook for reducing stimulus.
“It’s impossible to believe there are people who didn’t think the Fed was going to start tapering, to start reducing the extended stimulus, within a reasonably short time as long as unemployment continued falling and growth continued,” Fischer said.
“The only explanation that added up is that investors thought up until that point that the Fed was not only worrying about unemployment and inflation, it was also worrying about stability of financial markets,” Fischer said.
The Fed is likely to reduce quantitative easing “modestly” before Bernanke leaves, Fischer said.
The former central banker also referred to the likely effect of Fed policy on developing nations.
“As for emerging-market economies, their interest rates should be expected to go up and will go up when the Fed does start tapering,” he said. “Again, they should not be expected to go up as rapidly as they did in May through September.”
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