The vice chairman assured attendees that the Fed is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The USA central bank has said it will raise rates only when it sees a sustained recovery in the economy. This illustrates a serious asymmetry in the Fed’s decisionmaking. The prospect of a rate increase by the Fed has also alarmed global stock markets, because it could draw investment funds out of emerging markets and back to the US. And the unemployment rate is at a seven-year low of 5.3 percent.
Yet exceedingly low inflation has thrown a wrench into those plans. While some effects of the rise in the dollar may be spread over time, some of the effects on inflation are likely already starting to fade.
These headwinds, Fischer said, were beginning to subside.
After the meeting of central bankers at the Jackson Hole symposium, doubts about a possible rate hike in September still remain.
The Fed is monitoring the fallout for the US from stock market turmoil spurred by concerns about a slowdown in China.
Even so, Fischer declined to deliver an explicit verdict on September.
“There’s inflationary pressure because USA growth is still gaining traction”. It makes debt more onerous to pay off and is often associated with stagnant wages.
But the dollar has seen a pullback recently amid the global selloff, losing more than 3 percent in four trading sessions last week. Fischer also called the recent decline in energy prices a “largely one-off event”.
The Fed has a “dual mandate” of stabilizing US inflation and achieving maximum employment. “That can’t be viewed as having been a success on the monetary policy front”.
Moran said Fed officials look like they will go into the September meeting with “an open mind rather than a committed position”. The 30-year bond slipped 5/32 in price with a yield of 2.910 percent, down less than 1 basis point as traders bet long-dated issues will fare better than shorter-dated ones if the Fed raises rates soon.
“It is far from clear that the next Fed move will be a tightening”, Summers wrote on Twitter.
New research from Societe Generale made the case that central banks are overburdened and “it is the absence of sufficient structural reform and sufficient balance sheet deleveraging that leaves the global economy highly vulnerable to new shocks”.
One idea appearing to gain ground on Friday hinged on the Fed raising rates once or twice and then holding off until inflation started to rise to its 2 percent target.
However, Fischer attempted to shift attention away from that first step.
The debate isn’t confined to the Fed’s boardroom.
“It is more important to the U.S. whether or not GM and Ford can sell cars there”, said Kim Forrest, senior equity research analyst, Fort Pitt Capital Group in Pittsburgh.
While United States officials are weighing the timing of their first interest-rate hike since 2006, and the Bank of England may tighten early next year, the ECB has heard calls to extend its quantitative easing programme to provide more protection against potential deflation.