Fed's Fischer: downshift in potential means 'not that simple' to raise rates


Low interest rates also make it much more hard for central banks to respond to any shocks to the economy, as there is little room to cut rates when they are already close to the effective lower bound. "So we're not in deep trouble with monetary policy at the moment", he responded when asked about the concept of raising the Fed's inflation target.

"We are very close to our targets" of full employment and 2-percent inflation, said Stanley Fischer. "To change that target if you are so close, that's a problem".

The Empire State Manufacturing Survey in NY in October fell to negative 6.8 from negative 2 in September.

Stimulative fiscal policies could also be beneficial he said, but with a caveat perhaps, " if the economy confronted a recession".

He said low productivity growth, the increasing numbers of Americans retiring from the workforce, low corporate investment, and slow worldwide economic growth are all working, against Fed policy, to dampen U.S. economic growth.

In a speech on Monday Federal Reserve Vice-Chair Fischer examined the causes of low interest rates, a subject which has been a key element in many speeches by global central bankers over the past few months.

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Nonetheless, Fischer acknowledged that "having very low interest rates makes monetary policy more hard", especially if faced with a recession.

Park Sung Woo, a foreign exchange analyst at NH Futures, said that the market seems to have regarded Mr Fischer's statement as being less confident about the state of the USA economy, denting the greenback's current rally.

Numerous forces holding down growth, such as demographics, are beyond the reach of policy. And hopes of boosting productivity or investment may rest more with other branches of government that could boost spending at their discretion, Fischer said.

Fischer did not comment specifically on the likelihood of a rate increase at the Fed's November or December meetings.

Firstly, low rates are a symptom of low underlying growth and productivity in the economy, which tends to undermine prosperity growth.

The closer that long-run rate comes to zero, the less room policymakers will have in the future to counter any downturn.