Fischer said on Monday in New York that raising interest rates “likely will be warranted before the end of the year” and cautioned policy wouldn’t be uniform or predictable.
“Whether it’s going to be June or September, or some later date, or some date in between, will depend on the data that appear between now and then,” he told the Economic Club of New York. The dollar extended the biggest weekly decline in three years after his remarks, as investors bet the U.S. central bank would take its time in tightening policy.
Officials last week opened the door to a rate increase as soon as June, while indicating in their forecasts they will go slow once they get started. Fischer’s comments are the first from Fed leadership since Chair Janet Yellen’s Wednesday press conference after the Federal Open Market Committee (FOMC) meeting.
Highlighting labor-market strength, Fischer said there had been “two very positive numbers for the first quarter of 2015” and officials are waiting for the next monthly employment report, due on April 3. He also said that inflation was “way lower” than the Fed’s 2 percent target, which was last touched in April 2012. Inflation as measured by the Fed’ preferred gauge rose 0.2 percent in January from a year earlier.
The Fed wants to be “reasonably confident” inflation is rising toward its 2 percent goal before moving. A stronger dollar could interfere by holding down import prices. Fischer, however, was unfazed by the strength of the dollar, which has advanced 4.7 percent this year on the Bloomberg Dollar Spot index. He argued that its rise reflected the performance of the U.S. economy and central bank bond buying in Europe and Japan, which will also benefit U.S. growth.
“What is not acceptable is manipulating exchange rates — purely exchange rates — trying to use that as the sole means of generating growth,” Fischer told the audience. “That has not happened as far as we can tell in our partner countries.”
“Fischer was trying to inject more uncertainty into this market-implied forecast for rates,” said Aneta Markowska, chief U.S. economist at Societe Generale SA in New York. “They want the market to price in uncertainty, but they don’t want any tightening in financial conditions.”
Fed officials are wary of repeating the so-called taper tantrum. Remarks in May 2013 by then-Chairman Ben S. Bernanke that the central bank would start reducing the scale of its bond purchases in the next few meetings caught investors unawares and caused bond yields to rise sharply.
Fischer cautioned “a smooth path upward in the federal funds rate will almost certainly not be realized” as the economy encounters shocks such as the plunge in oil prices.
“By going to flexible, he is inducing volatility,” said Torsten Slok, chief international economist at Deutsche Bank AG in New York. “Maybe the first step is to increase volatility” with the aim of making financial markets better prepared for an eventual rate increase, he said.
Fed officials often emphasize that they’re making decisions based on economic reports, not out of adherence to a pre-ordained plan. Fischer emphasized this again in his speech, saying investors shouldn’t expect a repeat of the 17 rate increases at consecutive FOMC meetings starting in 2004.
Still, that doesn’t always work out in practice. Michael Gapen, chief U.S. economist for Barclays Plc in New York and former Fed Board researcher, pointed to the Fed’s tapering of its third round of asset purchases. Policy makers slowed the program from an initial pace of $85 billion a month by $10 billion increments at successive meetings.
“They said it wasn’t on a preset course but in the end it was,” Gapen said. “Fischer said you should look at how we’ve behaved in the past, but that’s how they behaved with the tapering.”