Inflation is likely to remain low for more time than the Federal Open Market Committee expects, Federal Reserve Vice Chairman Stanley Fischer said Monday.
The FOMC held interest rates at its last meeting as data indicated further labor market improvement, despite economic slowness. "But further declines in oil prices and increases in the foreign exchange value of the dollar suggested that inflation would likely remain low for somewhat longer than had been previously expected before moving back to 2 percent," Fischer said in a speech in New York, according to prepared text released by the Fed.
"Once these oil and import prices stop falling and level out, their effects on inflation will dissipate, which is why we expect that inflation will rise to 2 percent over the medium term, supported by a further strengthening in labor market conditions," he said.
Fischer also cited the global economic outlook, particularly China, and "volatility in global asset markets" as reasons why it was appropriate to hold rates. "At this point, it is difficult to judge the likely implications of this volatility. If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States," he said.
Recent periods of volatility, he said, haven't permanently scarred the economy.
Monetary policy remains accommodative and the federal funds rate target will be lifted gradually, likely remaining "for some time, below the levels that we expect to prevail in the longer run."
Fischer would not speculate about what the FOMC will do at its next meeting. "I can't answer that question because, as I have emphasized in the past, we simply do not know," he said. "The world is an uncertain place, and all monetary policymakers can really be sure of is that what will happen is often different from what we currently expect."
Overshooting the long-run normal unemployment rate would not concern Fisher, who called a modest miss "appropriate in current circumstances."
Keeping the Fed's balance sheet high "for a time" is beneficial since it "help[s] support accommodative financial conditions and so reduce[s] the downside risks to the economic outlook in the event of a future adverse shock to the economy."
