U.S. inflation to rebound next year, says Fed’s Fischer

Federal Reserve Vice Chairman Stanley Fischer attends a TV interview during the Federal Reserve Bank of Kansas City's annual Jackson Hole Economic Policy Symposium in Wyoming
Federal Reserve Vice Chairman Stanley Fischer in Jackson Hole, Wyoming August 28, 2015. REUTERS/Jonathan Crosby

November 12, 2015

By Jonathan Spicer

WASHINGTON (Reuters) – U.S. inflation should rebound next year, the Federal Reserve’s second-in-command said on Thursday, as he noted that the central bank could move next month to raise interest rates.

The comments by Fed Vice Chairman Stanley Fischer could be taken as yet another signal the central bank is less willing to let low inflation further delay policy tightening.

He said the economy has done well reasonably well thanks in part to a delay in interest-rate hikes. It has been nearly a decade since the Fed last raised rates.

Reinforcing previously stated confidence that more inflation was around the corner, Fischer said he expects the central bank’s preferred measure to rebound to 1.5 percent next year and to hit a 2 percent goal in the “medium term.”

“Some of the forces holding down inflation in 2015, particularly those due to a stronger dollar and lower energy prices, will begin to fade next year,” Fischer told a conference of researchers and market participants at the Fed Board.

“While the dollar’s appreciation and foreign weakness have been a sizable shock, the U.S. economy appears to be weathering them reasonably well, notwithstanding their large effects on certain sectors of the economy heavily exposed to international trade.”

The U.S. dollar has risen about 15 percent since mid-2015 as the Fed started its long march to a rate hike, as other major central banks added stimulus, and as investors crowded into U.S.-denominated assets in the face of slowdowns elsewhere.

The stronger dollar has helped depress the key personal consumption expenditure (PCE) core price measure, which is at 1.3 percent.

While Fischer said there is “good reason” to expect the dollar drag on U.S. economic growth to persist well into next year, especially for exporting manufacturers, the effect on inflation is more temporary.

He noted that the dollar’s strength prompted Fed policymakers to downgrade growth and inflation predictions over the last year and to delay policy tightening, which he called appropriate.

The currency probably shaved 0.25-0.5 percentage point from inflation this year, according to Fed models, he said.

Fischer, Fed Chair Janet Yellen and other policymakers have repeated that an initial rate hike is likely next month.

Fischer noted that the Fed’s policy-setting committee last month specifically indicated “that it may be appropriate” to move at the central bank’s Dec. 15-16 meeting, though he said it will depend on progress toward inflation and employment goals.

“Of course, as policymakers, we must always be vigilant to events unfolding differently than we expect, and we must be ready to react accordingly,” he said.

(Reporting by Jonathan Spicer; Editing by Leslie Adler)