Fed Vice Chairman Sees Good Reason to Believe Inflation Will Rise

Federal Reserve Vice Chairman Stanley Fischer kept the door open to an interest-rate rise next month, arguing the Fed should not wait until it hits its inflation goal to act and voicing confidence price pressures will mount.

“Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further,” Fischer said Saturday at the Kansas City Fed’s annual retreat in Jackson Hole, Wyoming.

“With inflation low, we can probably remove accommodation at a gradual pace,” he said without specifying when the Fed should start. “Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening.”

The Fed is monitoring the fallout for the U.S. from stock market turmoil spurred by concerns about a slowdown in China.

Investors bet that could persuade the U.S. central bank to delay raising rates. Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said it suggested that Fischer wants to get going on rate hikes.

“It sounds like Fed Vice Chairman Fischer is getting an itchy trigger finger when it comes to lifting rates,” he said in a note to clients. “Today’s news represents an important change possibly in the leadership of the Fed’s position, which clears the way for action on Sept. 17.”

Rupkey is among economists who have said that, with unemployment at 5.3 percent, close to what the Fed considers full employment, it is time for a rate increase.

Timing Unclear

In his prepared remarks, Fischer stopped short of providing a clear signal on whether the Federal Open Market Committee will start to tighten policy at its next scheduled meeting Sept. 16-17.

“We will need to consider all the available information and assess its implications for the economic outlook before coming to a judgment,” he said. He later told the symposium “I do not plan to upset your rational expectation that I cannot tell you what decision the Fed will reach by Sept. 17.”

William Spriggs, chief economist at the AFL-CIO, the largest U.S. federation of labor unions, listened to Fischer and came away with the impression that he was getting ready to act.

“His remarks made me very nervous because it was so heavy on the impression that everything that’s holding down inflation is going to go away soon,” Spriggs said. “So since they’re going to be close to their target they can start to raise rates.”

China’s Slowdown

Fischer briefly referenced concerns about China’s slowdown, saying the Fed is “following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual.”

Fischer said oil’s plunge not only affects total inflation but can drag down core inflation. The dollar’s strength, he said, also has weighed on inflation and will continue to restrain growth in the U.S., perhaps into 2017.

Still, Fischer characterized those forces as temporary. “Markets do not expect oil prices to fall further, so their influence in holding down inflation should be temporary,” he said.

Probabilities of a rate move at next month’s FOMC meeting were 38 percent at New York’s close on Friday, down from 48 percent on Aug. 14, according to trading in federal funds futures. The chances of liftoff at the following FOMC meeting, on Oct. 27-28, are 49 percent.

2015 Liftoff

Fed Chair Janet Yellen said in July the Fed is likely to raise rates this year, provided the economy grows as expected. Policy makers, who have held rates near zero since 2008, must judge if the U.S. economy has sufficient momentum to shrug off weaker growth abroad as they weigh the timing of liftoff.

A dimmer outlook for world growth has pushed commodity prices lower, potentially creating another headwind for feeble U.S. inflation, which has been beneath the Fed’s 2 percent target for more than three years.

On the other hand, U.S. gross domestic product growth was better than expected in the second quarter at a 3.7 percent annualized rate, and monthly job gains have averaged a solid 211,000 so far this year. Economists expect a 220,000 gain when August data are reported on Sept. 4.

Fischer said “we now await the results of the August employment survey,” while adding that other gauges of the labor market would also help guide the Fed’s policy decision.