Fed’s Fischer sees ‘first stirrings’ of rising inflation
The US may be seeing the “first stirrings” of a long-awaited increase in inflation as the impact of a strong jobs market works its way through the economy, according to the Federal Reserve’s second-in-command.
In a speech to a group of business economists in Washington on Monday, Stanley Fischer, the Fed’s vice-chairman, dismissed critics within the profession who have pointed to wage stagnation in the US as evidence that the traditional link between strong employment and inflation “must have been broken”.
“I don’t believe that. Rather the link has never been very strong, but it exists, and we may well at present be seeing the first stirrings of an increase in the inflation rate — something that we would like to happen,” he told the National Association of Business Economists.
The comments were Mr Fischer’s final ones in public before the March 15-16 meeting of the policy-setting Federal Open Market Committee, during which markets and Fed observers widely expect the US central bank to hold rates steady thanks to rising concerns about the global economy.
They also came alongside more downbeat remarks from another FOMC member that highlighted what is likely to be the debate inside the policy-setting committee when it gathers next week.
While Mr Fischer in his speech defended the so-called “Phillips Curve”, which describes the link between employment and inflation, as a resilient and longstanding element of economic theory, others on the committee have expressed greater scepticism.
The issue is critical because inflation has consistently been coming in below the Fed’s 2 per cent target rate even as the jobs market has recovered, although there have been signs of an acceleration. In January, the US’s core PCE consumer price inflation rose to 1.7 per cent. February figures are due out on March 16, the same day that the Fed will announce the result of its latest deliberations.
Speaking across town to a group of bankers on Monday, Lael Brainard, a member of the Fed’s board of governors who has emerged in recent weeks as one of its most vocal doves, said the Fed still needed to be mindful of “weak and decelerating foreign demand”. It meant policymakers should not take “the strength in the US labour market and consumption for granted”, she said.
“Tighter financial conditions and softer inflation expectations may pose risks to the downside for inflation and domestic activity,” she said. “From a risk-management perspective, this argues for patience as the outlook becomes clearer.”
She also warned that the FOMC “should put a high premium on clear evidence that inflation is moving toward our 2 per cent target” and that “inflation has persistently underperformed relative to our target”.
“Given the currently weak relationship between economic slack and inflation and the persistent, depressing effects of energy price declines and exchange rate increases, we should be cautious in assessing that a tightening labour market will soon move inflation back to 2 per cent,” she said. “We should verify that this is, in fact, taking place.”
In his speech, Mr Fischer on Monday pointed to other lingering problems in the US economy, including a dramatic fall in the rate of productivity growth in the US “and in much of the world” over the past 20 years. “There are few issues more important for the future of our economy, and those of every other country, than the rate of productivity growth,” he said.
But he also said the Fed and other major central banks still had the capacity to respond to any slowing in the global economy, despite concerns in some quarters about the impact on monetary policy of negative interest rates in Japan and the eurozone on quantitative easing. “I believe that central banks still have the capacity through QE and other measures to run expansionary monetary policies, even at the zero lower bound,” he said.