There will be “considerable uncertainty” about what happens to interest rates after the Federal Reserve raises its target from zero later this year, the number-two official at the central bank said Monday.
Fed Vice Chairman Stanley Fischer said Monday at a speech in New York that an increase in the Fed’s target for short-term interest rates will “likely will be warranted” this year. It would be the first time the Fed has raised rates since it lowered its target to zero during the financial crisis in 2008.
But what happens after that initial hike is a matter of “uncertainty,” Fischer said, because the Fed will react to incoming data relating to the economy, inflation, unemployment and financial markets, all of which could change.
Fischer’s comments echoed those of Federal Reserve Chairwoman Janet Yellen, who said at a press conference last week that the Fed “can’t provide certainty, and shouldn’t provide certainty” because of changing economic conditions.
Both Yellen and Fischer’s remarks on interest rates are closely watched by investors. The Fed’s target for short-term rates influences the interest rates on all financial instruments, from savings accounts to mortgages.
In normal times, the Fed conducts monetary policy by changing the target rate for short-term interest. Over the past six years, however, with that rate at zero, it also has engaged in promises to keep rates lower for longer as well as large-scale bond purchases to stimulate the economy.
Now, with the unemployment rate near what the Fed considers a healthy level at 5.5 percent, the Fed is preparing to rely on rate targeting again. Officials are advising investors that their decisions will be based on unemployment continuing to fall and inflation heading toward the Fed’s 2 percent goal. Depending on the incoming data, those decisions could go a number of ways.
“A smooth path upward in the [target] rate will almost certainly not be realized, because, inevitably, the economy will encounter shocks,” Fischer said. “Shocks like the unexpected decline in the price of oil, or geopolitical developments that may have major budgetary and confidence implications.”
That outlook is very different from the last time the Fed raised rates, beginning in 2004. Then, former chairmen Alan Greenspan and Ben Bernanke oversaw 17 consecutive quarter-percentage point increases in the target rate.
This time will be different, Fischer said, but the Fed “will continue to be absolutely transparent in explaining its decisions and how and why they contribute to meeting the legally mandated dual goals of monetary policy.”
Those goals are full employment and stable inflation, defined by the Fed as 2 percent inflation.
In its latest monetary policy announcement, the Fed also said that it would take into consideration developments in the international economy, as weak growth overseas could threaten U.S. growth and already has crimped U.S. exports.
