Fed No. 2 Stanley Fischer: Rate Hike Should Not Wait For Inflation

Stanley Fischer Inflation

Federal Reserve Vice Chairman Stanley Fischer said Saturday that he thinks inflation will eventually hit the Fed’s 2% target.

Fischer made the comments in Jackson Hole, Wyoming, at the annual Economic Symposium hosted by the Federal Reserve Bank of Kansas City. He said “there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further,” and that the broader health of the economy will prove a more significant measure of whether it is time for a rate hike than any one indicator.

“With inflation low, we can probably remove accommodation at a gradual pace,” Fischer said. “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.”

In other words, the direction the economy is heading should be the Fed’s primary concern. With unemployment close to what economists consider full employment and other indicators of economic growth continuing to show promise, Fischer is signaling an optimism that could mean an interest rate increase sooner rather than later.

But at its July meeting, the Fed expressed concern with the slow pace of growth in the labor market. Fischer pointed to that as a key factor on Saturday, saying that “we now await the results of the August employment survey.”

Lagging inflation has been a continuing worry, with the most recent measure for the year ending in July showing only a 0.3% increase in the price level. That’s much lower than the Fed’s target of 2% and indicates that economic strength still is not where it should be, particularly in terms of wage growth.

Fischer declined to predict where monetary policy will go next month, saying he “will not, and indeed cannot, tell you what decision the Fed will reach Sept. 17.” But his analysis carries added weight because Fed Chair Janet Yellen was not in attendance at Jackson Hole.