The Vice-Chairman of the Board of Governors of the Federal Reserve System, Stanley Fischer, has said that the downward pressure on US inflation will ease and inflation will head higher toward the Fed’s inflation target of 2 percent. Also, because monetary policy acts with a lag, he does not want the Fed to wait for inflation to reach 2 percent before beginning to gradually raise interest rates.
He cited three factors for the downward pressure on US inflation: stronger dollar, falling oil prices, and slack in the US labor market.
The stronger dollar is because of US growth and weakness in the rest of the global economy including in Europe and China. While Europe is slowly recovering, the Chinese economy, which Fischer said the Fed is observing closely, is currently engaged in two economic reforms: converting the renminbi into a freely tradeable currency and lowering the dependence of the economy on exports and manufacturing and reorienting it to raise the contribution of consumption and services in the GDP. These reforms will take time and slower Chinese growth implies continued downward pressure on global inflation.
Falling oil prices are largely due to excess supply of the commodity which is expected to remain as the global economy recovers.
The slack in the US labor market will gradually diminish as unemployment continues to fall and wage pressures begin to rise.
The three factors outlined by Fischer, thus, will not wane in the near term and, therefore, inflation will remain below the Fed’s target for sometime making now an inopportune time for the Fed to begin raising rates.