Wednesday, 24 February 2016

Fed's Fischer says market turmoil may pass with little economic impact

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

It is still unclear whether the recent downturn in global financial markets will have any substantial impact on the U.S. economy, Federal Reserve Vice Chairman Stanley Fischer said on Tuesday, suggesting the episode may still pass without much effect on the Fed's plans.

"If the recent financial market developments lead to a sustained tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States," Fischer said at an energy industry gathering in Houston.

"But we have seen similar periods of volatility in recent years ... that have left little visible imprint on the economy, and it is still early to judge the ramifications."

Fischer says no Fed plan to move to negative interest rates
The volatility in global markets since the Fed began tightening rates in December has led many investors to discount the likelihood of a second Fed move anytime soon, with the upcoming March meeting all but ruled out.

Fischer did not speak directly to the point. But he did indicate that there was no rush, and in particular repeated that he feels it would be "appropriate" if the economy ran at more than full employment for a period of time.

Pushing beyond what is considered a "natural" rate of employment could theoretically risk a spike in inflation that would force the Fed to react quickly. But the U.S. central bank is still struggling to understand the effect of low oil prices on global inflation rates, a recent decline in U.S. inflation expectations, and other forces that may be causing the economy to act differently than it has in the past.

The unemployment rate is currently 4.9 percent but is expected to fall lower. Estimates of the unemployment rate that would put pressure on inflation range close to 4 percent at the low end.

"A modest overshoot," of full employment would ensure people who want to rejoin the labor force or work more hours get a chance to do so, Fischer said, and could also help ensure the Fed reaches its 2 percent inflation goal.


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