Fed's Fis­cher sees in­fla­tion re­bound, al­low­ing grad­ual rate hikes

The Pak Banker - - FRONT PAGE -

US in­fla­tion will likely re­bound as pres­sure from the dol­lar fades, al­low­ing the Fed­eral Re­serve to raise in­ter­est rates grad­u­ally, Fed Vice Chair­man Stan­ley Fis­cher said in a speech care­ful not to over­re­act to a pos­si­ble Chi­nese slow­down.

The in­flu­en­tial US cen­tral banker was cir­cum­spect whether he would pre­fer to raise rates from near zero at a much-an­tic­i­pated pol­icy meet­ing on Sept. 16-17. But he said down­ward price pres­sure from the ris­ing dol­lar, fall­ing oil prices, and slack in the U.S. la­bor mar­ket is fad­ing. The cau­tious con­fi­dence from Fis­cher, as well as from Bank of Eng­land Gover­nor Mark Car­ney who spoke at a con­fer­ence along­side him, sug­gests at least two ma­jor cen­tral banks are poised to look be­yond a week of fi­nan­cial­mar­ket tur­moil brought on by fears that China's econ­omy is fal­ter­ing.

"Given the ap­par­ent sta­bil­ity of in­fla­tion ex­pec­ta­tions, there is good rea­son to be­lieve that in­fla­tion will move higher as the forces hold­ing down in­fla­tion dis­si­pate fur­ther," Fis­cher told a cen­tral bankers' con­fer­ence in Jack­son Hole, Wy­oming. "With in­fla­tion low, we can prob­a­bly re­move ac­com­mo­da­tion at a grad­ual pace," he added. "Yet, be­cause mon­e­tary pol­icy in­flu­ences real ac­tiv­ity with a sub­stan­tial lag, we should not wait un­til in­fla­tion is back to 2 per­cent to be­gin tight­en­ing."

Cen­tral banks and gov­ern­ments glob­ally are brac­ing for the Fed de­ci­sion, which could weaken for­eign cur­ren­cies and put even more pres­sure on emerg­ing mar­kets al­ready reel­ing af­ter the volatile global stocks sell­off.

At the same time, Fis­cher, Car­ney and other pol­i­cy­mak­ers are wrestling with the world's stub­bornly low lev­els of in­fla­tion, and rec­og­niz­ing that the rapid pace of glob­al­iza­tion over the last quar­ter cen­tury may have made it harder for any in­di­vid­ual coun­try to move in­fla­tion higher.

"There are pro­found sec­u­lar and cycli­cal dis­in­fla­tion­ary forces at work in the global econ­omy," Car­ney said, mak­ing it harder for cen­tral banks in Lon­don, Washington and else­where to reach the in­fla­tion tar­gets they have set as a core pol­icy goal. The Fed has said it wants to be rea­son­ably con­fi­dent that in­fla­tion, which has been stuck be­low its 2-per­cent tar­get for a few years, will re­bound in the medium term. The pickup in prices could stall, how­ever, if a slow­down in China and fall­ing com­mod­ity prices drag down the global econ­omy.

"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," said Fis­cher, a close ally of Fed Chair Janet Yellen.

The Fed's pre­ferred mea­sure of in­fla­tion slipped to 1.2 per­cent in July, the low­est in more than four years. Fis­cher said the dol­lar's year­long rise played a big role in that weak­ness, and it could re­strain U.S. gross do­mes­tic prod­uct growth through 2016 and even into 2017 - all the more rea­son to "pro­ceed cau­tiously" in rais­ing rates, he said.

Out­side the con­fer­ence on Fri­day, Fis­cher made an im­promptu tele­vi­sion ap­pear­ance to say it was too early to say whether the Fed should in Septem­ber hike rates for the first time in nearly a decade. Mar­kets, on alert for any sign pol­i­cy­mak­ers were rul­ing out a Septem­ber liftoff, read Fis­cher's re­marks as sug­gest­ing a tight­en­ing would at least come this year.

While cen­tral banks in China, Ja­pan, and Europe are ramp­ing up mon­e­tary stim­u­lus to fight off de­fla­tion or boost growth, the BoE, like the Fed, is plot­ting when to be­gin tight­en­ing pol­icy. Car­ney said a slow­down in China could de­press UK in­fla­tion fur­ther but it did not, for now, change his cen­tral bank's po­si­tion on when and how it might raise rates. Econ­o­mists pre­dict the Bank of Eng­land is likely to start rais­ing rates in the first quar­ter of next year.

The de­vel­op­ments "are un­likely to change the process of rate in­creases from lim­ited and grad­ual to in­fin­i­tes­i­mal and in­ert," Car­ney told the con­fer­ence, re­it­er­at­ing that the BoE's pol­icy de­ci­sion would be­come clearer "around the turn of the year."

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