Geopolitical risks have driven up uncertainty about the economy, the No. 2 official at the Federal Reserve said Wednesday, indicating that recent market volatility could play into the central bank’s plans the rest of the year.
Appearing on CNBC Wednesday morning following news that North Korea may have tested a hydrogen bomb, and in a week marked by financial turmoil in China, Federal Reserve Vice Chairman Stanley Fischer said “there are levels of uncertainty and they’ve risen a bit now.”
“I can’t, at this moment, figure out what the hydrogen bomb news or rumor means,” said Fischer, whose remarks are closely watched by investors. “We’ve just got to keep watching and see what impact there is,” he said, adding that the news of falling markets in China was “probably more significant.”
The Fed’s plans, as sketched out by members at the December meeting, include four increases in its interest rate target this year, in addition to the first rate hike carried out in December.
Those plans are “in the ballpark,” Fischer said, but the Fed will debate what to do at each meeting.
“We have to react to incoming events and we will react to them,” he said.
More important that any one meeting’s decision, Fischer argued, is the overall path of short-term interest rates that investors and borrowers can expect. Nevertheless, he also brushed off the fact that bond investors expect two fewer rate hikes this year than Fed officials do, as suggested by current bond prices.
“We watch what the market thinks, but we can’t be led by what the market thinks,” he said of the discrepancy. “Our analysis says that the market is underestimating where we’re going to be.”
