U.S. inflation will likely rebound as pressure from the dollar fades, allowing the Federal Reserve to raise interest rates gradually, Fed Vice Chairman Stanley Fischer said on Saturday in a speech careful not to overreact to a possible Chinese slowdown.
The influential U.S. central banker was circumspect whether he would prefer to raise rates from near zero at a much-anticipated policy meeting on Sept. 16-17. But he said downward price pressure from the rising dollar, falling oil prices, and slack in the U.S. labor market is fading.
The cautious confidence from Fischer, as well as from Bank of England Governor Mark Carney who spoke at a conference alongside him, suggests at least two major central banks are poised to look beyond a week of financial-market turmoil brought on by fears that China's economy is faltering.
"Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further," Fischer told a central bankers' conference in Jackson Hole, Wyoming.
"With inflation low, we can probably remove accommodation at a gradual pace," he added. "Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening."
Central banks and governments globally are bracing for the Fed decision, which could weaken foreign currencies and put even more pressure on emerging markets already reeling after the volatile global stocks selloff.
At the same time, Fischer, Carney and other policymakers are wrestling with the world's stubbornly low levels of inflation, and recognizing that the rapid pace of globalization over the last quarter century may have made it harder for any individual country to move inflation higher.
"There are profound secular and cyclical disinflationary forces at work in the global economy," Carney said, making it harder for central banks in London, Washington and elsewhere to reach the inflation targets they have set as a core policy goal.
The Fed has said it wants to be reasonably confident that inflation, which has been stuck below its 2-percent target for a few years, will rebound in the medium term. The pickup in prices could stall, however, if a slowdown in China and falling commodity prices drag down the global economy.
"At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual," said Fischer, a close ally of Fed Chair Janet Yellen.
The Fed's preferred measure of inflation slipped to 1.2 percent in July, the lowest in more than four years.
Fischer said the dollar's year-long rise played a big role in that weakness, and it could restrain U.S. gross domestic product growth through 2016 and even into 2017 - all the more reason to "proceed cautiously" in raising rates, he said.
Outside the conference on Friday, Fischer made an impromptu television appearance to say it was too early to say whether the Fed should in September hike rates for the first time in nearly a decade. Markets, on alert for any sign policymakers were ruling out a September liftoff, read Fischer's remarks as suggesting a tightening would at least come this year.
While central banks in China, Japan, and Europe are ramping up monetary stimulus to fight off deflation or boost growth, the BoE, like the Fed, is plotting when to begin tightening policy.
Carney said a slowdown in China could depress UK inflation further but it did not, for now, change his central bank's position on when and how it might raise rates.
Economists predict the Bank of England is likely to start raising rates in the first quarter of next year.
The developments "are unlikely to change the process of rate increases from limited and gradual to infinitesimal and inert," Carney told the conference, reiterating that the BoE's policy decision would become clearer "around the turn of the year."