As the Federal Reserve lays the ground to raise U.S. interest rates for the first time in nearly a decade, it should weigh the effects of its decisions on global economies and expect some bouts of volatility in financial markets, a top Fed official said on Tuesday.
“The U.S. economy and the economies of the rest of the world have important feedback effects on each other,” U.S. Federal Reserve Vice Chairman Stanley Fischer said in Israel. “To make coherent policy choices, we have to take these feedback effects into account.”
Fed Chair Janet Yellen last week signaled the U.S. central bank is on track to raise rates this year, despite a weak first quarter that some analysts believe could force the Fed to wait longer before starting its first tightening cycle since 2004-2006.
Fischer gave no time frame for raising rates in the text of his remarks, but made it clear that higher rates are coming. “Markets should not be greatly surprised by either the timing or the pace of normalization,” he said.
“The actual raising of policy rates could trigger further bouts of volatility, but my best estimate is that the normalization of our policy should prove manageable for the emerging market economies,” he added.
Still, he said, communications can be a “tricky business,” and when the Fed does tighten, policymakers are bracing for spillovers to financial markets both at home and abroad.
Some of the world’s more vulnerable economies, he said, “may find the road to normalization somewhat bumpier.”
To smooth the way, he said, the Fed will communicate its view of the economy and its policy intentions “as clearly as possible.”
“In the normalizing of its policy, just as when loosening policy, the Federal Reserve will take account of how its actions affect the global economy,” he said.
If foreign economic growth is slower than anticipated, the Fed could raise rates more slowly than otherwise, he said.
At the same time, he said, the Fed is not the world’s central bank, and will calibrate policy based on its domestic objectives of fostering full U.S. employment and 2 percent inflation.
“We are working to ensure that our financial institutions and other market participants are prepared for the normalization of monetary policy and the return to a world of higher interest rates,” Fischer said. “It is equally important that individuals, businesses, and institutions around the world do the same.”
(Reporting by Ari Rabinovitch; Writing by Ann Saphir Editing by W Simon)
http://www.reuters.com/article/2015/05/26/us-usa-fed-fischer-idUSKBN0OB24620150526