Fed's Fischer: 'Good Reason' to Think U.S. Inflation Will Move Higher -- Update
30 August 2015 - 3:10AM
Dow Jones News
By Ben Leubsdorf
JACKSON HOLE, Wyo.--The Federal Reserve's No. 2 official said
there is "good reason" to think sluggish U.S. inflation will firm
and move back toward the U.S. central bank's 2% annual target,
touching on a significant assessment facing the Fed ahead of its
September policy meeting.
"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," Fed Vice Chairman
Stanley Fischer said Saturday in remarks prepared for delivery at
the Federal Reserve Bank of Kansas City's annual economic
symposium.
In its last policy statement, the Fed said its first
interest-rate increase will come after "some further improvement in
the labor market" and when officials are "reasonably confident"
inflation will move back to the central bank's 2% annual
target.
Mr. Fischer, in his Saturday remarks, didn't declare whether
those conditions had been fulfilled. He said the Fed awaits the
Labor Department's August jobs report, due out Sept. 4. On
inflation, "with regard to our degree of confidence in this
expectation, we will need to consider all the available information
and assess its implications for the economic outlook before coming
to a judgment," he said.
On Friday, Mr. Fischer told CNBC that "it's early to tell" what
the Fed will do at its Sept. 16-17 policy meeting. Some policy
makers in recent days have signaled support for beginning to raise
short-term interest rates that have been pinned near zero since
December 2008, while others have said recent financial-market
volatility and worries about China's economy could justify delaying
the long-awaited liftoff.
Mr. Fischer said Saturday that Fed officials at the moment "are
following developments in the Chinese economy and their actual and
potential effects on other economies even more closely than
usual."
When the time comes to raise rates, Mr. Fischer said, "we will
most likely need to proceed cautiously" and with inflation low, "we
can probably remove accommodation at a gradual pace. Yet, because
monetary policy influences real activity with a substantial lag, we
should not wait until inflation is back to 2% to begin
tightening."
In his remarks, Mr. Fischer discussed various forces that he
said have restrained U.S. inflation, including declines in energy
prices, softness in non-oil commodity prices, a strengthening of
the dollar and "ongoing economic slack."
Despite improvement in the labor market, "we have seen no clear
evidence of core inflation moving higher over the past few years,"
Mr. Fischer said. "This fact helps drive home an important point:
While much evidence points to at least some ongoing role for slack
in helping to explain movements in inflation, this influence is
typically estimated to be modest in magnitude, and can easily be
masked by other factors."
The decline in energy prices over the past year "ought to be
largely a one-off event," he said, but he added that it is
"plausible" to think the dollar's rise will restrain output growth
"through 2016 and perhaps into 2017 as well."
Importantly, he said, longer-term inflation expectations "appear
to have remained generally stable since the 1990s." The Fed should
be "cautious in our assessment that inflation expectations are
remaining stable" in part because "measures of inflation
compensation in the market for Treasury securities have moved down
somewhat since last summer," he said. But such movements "can be
hard to interpret" and "may reflect factors other than inflation
expectations, such as changes in demand for the unparalleled
liquidity of nominal Treasury securities," he added.
Mr. Fischer, the former governor of the Bank of Israel, was
speaking Saturday on a panel about inflation dynamics with Bank of
England Gov. Mark Carney, European Central Bank Vice President
Vítor Constâncio and Reserve Bank of India Gov. Raghuram Rajan.
Write to Ben Leubsdorf at ben.leubsdorf@wsj.com
(END) Dow Jones Newswires
August 29, 2015 12:54 ET (16:54 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.