Market Insider

Fiscal stimulus could alter rate outlook, Fed's Stanley Fischer says

Fischer: Fiscal Policy could ease fed task

In his first comments since the election, Fed Vice Chairman Stanley Fischer said Friday he welcomes the possibility of more fiscal stimulus coming from Washington.

Fischer said more fiscal policy could change the Fed's view of what the underlying neutral rate is for the economy.

That is important because if the Fed believes the neutral rate will rise, it may have to raise its benchmark overnight lending rate more to slow the economy. Even if the Fed does not want to slow the economy, it could mean the central bank would be further behind the curve just to remain neutral.

President-elect Donald Trump has promised a hefty spending program to rebuild American infrastructure, and the newly elected Republican Congress is expected to endorse a fiscal stimulus plan early in his term.

Fischer said there is more than one policy tool. "There is fiscal policy, and in this particular instance it could be used for a quite a few reasons, and we have to see what happens," Fischer said.

Fischer said more expansive fiscal policy will increase the neutral rate "and ease the task of monetary policy."

Many Fed members have estimated the neutral rate is around zero. Economists expect the Fed to raise the federal funds target rate by a quarter point in December and twice next year.

Fischer, a voting member of the Fed's policy-setting committee, spoke in Santiago, Chile, at the annual conference of the Central Bank of Chile on U.S. monetary policy and the global economy.

The Fed vice chairman was the fourth Fed official to support the idea of a December rate hike since Tuesday's election.

Fischer said he and other policymakers have long said fiscal stimulus would be a helpful tool to spur economic growth, after years of extreme monetary easing policy from the Fed.

"On more expansionary fiscal policy, I think many members of Open Market Committee and Federal Reserve Board have commented that it would be useful to have a more expansionary fiscal policy. These statements were made over several months recently. I'm on record with that as having believed that," Fischer said.

Fischer also said the case for removing accommodation is "quite strong" while interest rates will plateau at a level that is lower than normal.

He expects U.S. rates to rise gradually, and said the Fed is close to achieving its dual mandate of 2 percent longer-run inflation and maximization of employment.