The Federal Reserve won’t wait until all of its goals are met to raise interest rates, Vice Chairman Stanley Fischer said Tuesday.
Speaking at Oxford University, Fischer said that “because monetary policy affects the economy with a lag, we should not wait until we have reached our objectives to begin adjusting policy.”
Fischer’s comments, which echo similar remarks from Fed officials such as Chairwoman Janet Yellen and Federal Reserve Bank of San Francisco President John Williams, underscore the possibility that the central bank could raise short-term interest rates even without its two main objectives being met.
The Fed is mandated by law to promote full employment and stable inflation, which it has defined as 2 percent annually.
At 5.5 percent in May, the unemployment rate is still above the roughly 5 percent level that the Fed believes represents full employment. Furthermore, Yellen and others believe that the unemployment rate understates the true problems in the economy, because a lot of people have been forced into part-time work or have quit the labor force entirely.
Meanwhile, inflation is well below the Fed’s 2 percent target, at 1.2 percent in the gauge favored by the Fed, which excludes food and energy prices. Inflation hasn’t risen above 2 percent in that metric since early 2012.
Yet those facts are no guarantee that the Fed will not tighten monetary policy, Fischer indicated.
In its latest monetary policy statement, the Fed has said it will move to raise its target interest rate from zero for the first time since 2008 when it is “reasonably confident” that inflation is heading up toward its goal. Fischer said that further improvement in the labor market should put upward pressure on inflation, but didn’t specify when the Fed might act.
Current bond market prices indicate that investors don’t expect a rate increase until the end of the year.
When the Fed does move, Fischer said, it will raise rates “only gradually.”
Fischer’s remarks were prepared for a group of African central bankers. He warned the officials that the Fed’s actions could create difficulties for emerging market economies, by leading investors to withdraw capital and making it more difficult for governments to issue debt.
