If inflation continues to fall, the Federal Reserve would have to respond by guaranteeing lower interest rates for longer, Federal Reserve vice chairman Stanley Fischer said Tuesday.
“If inflation is really heading south, we will have to do that,” the 71 year-old central banker said of prolonging the Fed’s zero-interest rate policy.
Fischer, speaking at a conference sponsored by the Wall Street Journal, clarified how the Fed would respond if inflation fell even as the unemployment rate continued to fall to levels consistent with full employment. Fischer noted that the central bank is mandated by law to target both maximum employment and stable inflation.
Inflation trended upward over the course of the summer, but has since fallen to slightly below the Fed’s 2 percent target. The consumer price index for October was steady at a 1.7 percent annual rate of inflation. Falling energy costs and slowing growth overseas is expected to weigh down on inflation in the months to come.
Nevertheless, Fischer said that he expects inflation to continue rising in the U.S. despite energy prices. In a separate appearance on Monday, he clarified that the effects of falling oil prices were likely to “be temporary.”
That leaves the Fed on track to raise short-term interest rates above zero for the first time since late 2008.
Fischer hinted Tuesday that the Fed would likely provide further specificity about the timing of rate hikes in its next few meetings.
The Fed’s latest monetary policy statement said that zero interest rates will be appropriate for a “considerable time,” depending on economic developments.
Fischer said that his colleagues were closer to removing that language, but declined to say whether they would do so at their next meeting, scheduled for December 16th and 17th.
“We don’t want to surprise markets,” Fischer said of changing the assurance of low rates in the face of uncertainty about the economy. When they do revisit their guidance about the timing of rate hikes, he said, they will likely add further context to avoid catching investors off guard.
Investors currently expect that the Fed will raise interest rates sometime in the second half of 2015.
