Rising Interest Rates Ahead
While speaking at a conference hosted by the Central Bank of Chile, Federal Reserve Vice Chair Stanley Fischer said the time for higher interest rates is almost here.
His comments were the first insight into the Fed’s thinking since the U.S. presidential election on Tuesday. Although there was no specific timeline provided, Fischer made a point of not addressing the electoral victory of Donald Trump. (Source: “Fed’s Fischer: Case is ‘Quite Strong’ for Raising Rates Gradually,” The Wall Street Journal, November 11, 2016.)
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Some are interpreting his silence on the issue as part of the Fed’s commitment to remain apolitical. The central bank is not supposed to be moved by political allegiances, much less make key monetary policy determinations based on them.
“In my view, the Fed appears reasonably close to achieving both the inflation and employment components of its mandate,” Fischer said. “Accordingly, the case for removing accommodation gradually is quite strong, keeping in mind that the future is uncertain and that monetary policy is not on a preset course.” (Source: Ibid.)
Inflation edged higher this year, coming ever closer to the Fed’s upper bound of two percent, and unemployment is down to 4.9%. The labor market showed strong gains by posting 161,000 new jobs in October and even the broader unemployment metrics have improved.
The measure, which includes discouraged and part-time workers, fell to 9.5%. When viewed in concert with rising inflation and stronger wage gains across the income spectrum, it certainly appears that there is less slack in the economy.
These conditions are precisely what the Fed was looking for in order to justify a rate hike.
However, the election may have thrown a wrench into the works. Yields on 10-year Treasuries surged through the week as Trump’s past statements about renegotiating U.S. federal debt came into play, but Fischer refused to comment on those market movements.
“Of course we will watch events and, depending on how the markets turn out and how the economy turns out, we will adjust our policy if we think that’s necessary,” he said. “If you ask me in which direction it would have an impact, I’m not even sure I could answer that question.” (Source: Ibid.)
