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Fed’s Fischer Says Rate Rise Probably Warranted by End-2015

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(Bloomberg) — Federal Reserve Vice Chairman Stanley Fischer said raising interest rates from near zero “likely will be warranted before the end of the year” and subsequent increases probably won’t be uniform or predictable.
“A smooth path upward in the federal funds rate will almost certainly not be realized” as the economy will encounter shocks such as the surprise plunge in oil prices or future geopolitical crises, Fischer said on Monday in remarks to the Economic Club of New York.

Policy makers last week opened the door to a rate increase as soon as June, while also indicating in their forecasts they will go slow once they get started.

“Whether it’s going to be June or September, or some later date, or some date in between, will depend on the data,” said Fischer, responding to a question from the audience. Labor market readings would be an important guide. The Labor Department reports on March payrolls on April 3.

“We’ve got two very positive numbers for the first quarter of 2015 and we’re waiting for another one,” said Fischer, 71, the former Bank of Israel governor who joined the Fed in May. U.S. employers added 534,000 new jobs in the first two months of 2015 and the jobless rate fell to 5.5 percent in February.

Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago, said the remarks indicate the Fed is agnostic on the exact timing of liftoff.

“It’s very clear from Stan’s view they don’t know exactly when they’re going to raise rates,” she said in a Bloomberg Radio interview. “There’s a growing divide within the Fed now of those people who think we have passed full employment, we don’t need further labor market improvement, and the core of the Fed that still believes we need more improvement.”

Forward Guidance

Fischer also said that while forward guidance on rates remains important, its role may diminish.
“It is likely that explicit long-term forward guidance will play less of a role in monetary policy after liftoff than it has during the past few years,” he said. “As monetary policy is normalized, interest rates will sometimes have to be increased, and sometimes decreased.”

After the first increase, Fischer said there’s no plan for the Federal Open Market Committee to follow a “steady rate of increase from zero to the longer-run normal nominal federal funds rate,” as it did a decade ago, or to raise rates by 25 basis points every meeting, or every second or third gathering.

Fischer said that while the European Central Bank’s bond purchases have helped strengthen the dollar, they are a net benefit to the U.S. economy by spurring growth in Europe and demand for American exports. He said much of the dollar’s appreciation reflects other factors, including the stronger performance of the U.S. economy relative to the euro area.

Fischer said last month the central bank looked most likely to raise rates in June or September, although economic developments might warrant different timing for liftoff. Since 2008, the Fed has held rates near zero and more than quadrupled its assets to $4.5 trillion in three rounds of bond buying.

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