Federal Reserve officials shouldn’t wait for inflation to rise to their target before tightening money, the central bank’s vice chairman said Saturday.
“Because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening,” Stanley Fischer said at a monetary policy conference in Jackson Hole, Wyo., according to prepared remarks.
Currently, annual inflation is just 0.3 percent in the index watched by the Fed for their 2 percent long-term target.
But Fischer reassured the audience that he anticipates inflation will rise in the months and years ahead as unemployment falls, output rises, and the financial market turmoil caused by recent international events subsides.
He warned that if the economy does “overheat” thanks to the Fed’s ongoing stimulus efforts, “we will have to move appropriately rapidly to deal with that threat” by raising interest rates. The Fed generally believes that its actions relating to interest rates and bond purchases affect the real economy on a long delay.
Fischer’s comments provide some guidance about the Fed’s thinking as it approaches the decision whether or not to raise its short-term interest rate target from zero for the first time since 2008 at its upcoming September meeting.
As the second-ranking official at the Federal Reserve Board of Governors, Fischer’s words are watched closely by investors. On Friday, Fischer hinted that a rate hike was still a possibility in September despite widespread concerns about recent turmoil in stock markets.
On Saturday at the event hosted by the Federal Reserve Bank of Kansas City, Fischer delved a little further into his thinking about recent market movements, including stock market volatility, falling oil prices and the stronger dollar.
The collapse in oil prices since last summer would likely only have transitory effects on U.S. inflation, he said, noting that consumers’ inflation expectations have been stable.
The same is true for the roughly 17 percent rise in the dollar versus other currencies since last summer. The stronger dollar would have greater effects on U.S. output by suppressing exports than it would on U.S. inflation by lowering import prices, Fischer argued. He said both of those factors have been in large part driven by questions about economic growth in China and elsewhere overseas.
“At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual,” he said.
