Global market turmoil has the potential to weaken US economic growth and inflation, US Federal Reserve Vice Chair Stanley Fischer said on Monday.
Fischer said in a speech that the ingredients for a global slowdown exist, though he said that it was still hardly clear how they will evolve and affect the Fed’s interest-rate policy.
Increased concern about the global outlook — including China’s slowdown and the crash in commodity prices — appears to have sparked the volatility in global asset markets, he said in a speech at the Council on Foreign Relations in New York.
“At this point, it is difficult to judge the likely implications of this volatility,” Fischer said. “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.”
However, he said that was not necessarily the scenario the Fed expects.
“We have seen similar periods of volatility in recent years that have left little permanent imprint on the economy,” he said.
Fischer’s comments came amid speculation that the Fed is becoming hesitant to move ahead with more increases in its benchmark interest rate this year after undertaking the first hike in more than nine years in December. At that time, a second quarter-point increase in the key rate range, from 0.5 to 0.75 percent, was expected next month, but the increased turmoil in markets and China’s economic troubles have raised a question mark over that.
Fischer acknowledged the changed global environment and that inflation, which the Fed wants to see pick up to 2 percent, remained at a tepid 1.4 percent level.
“Inflation has been pretty stable and we would like it to go up,” he said.
However, he said that there had been no decision either way for the March 15 and March 16 monetary policy meeting.
“We are closely monitoring global economic and financial developments and assessing their implications for the labor market and inflation, and for the balance of risks to the outlook,” he said. “We’ll be data-dependent and we’ll see what happens.”
Analysts took his remarks as indicating that the Fed was hedging its bets and not committed to a steady series of interest rate increases.
Fischer is “laying the brickwork for a hasty backtrack from hikes if needed,” DailyFX lead strategist John Kicklighter said in a tweet.
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