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Despite myriad of signs that say inflation is low, staying low, and perhaps going lower, Fed Vice Chairman Stanley Fischer is sanguine about price stability.
"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 said on Saturday during a panel at the Kansas City Fed's annual Economic Policy Symposium.
He specifically cited the University of Michigan survey of consumer expectations and the Philadelphia Fed's survey of professional forecasters.
(Federal Reserve Board)
Fischer acknowledged the the low readings coming from popular inflations metric like the PCE price index and CPI. And he brushed off the stronger dollar while he dismissed tumbling energy prices as a "one-off."
"Basically, Mr. Fischer is saying the stable inflation expectations provide an anchor for current and future inflation," HSBC's Kevin Logan said. "Though slack in the labor market is putting downward pressure on inflation, in his view, that should diminish as the labor market continues to improve. Though falling commodity prices and a strengthening USD are also putting downward pressure on inflation, these effects, too, should fade, and inflation should move back toward the Fed's 2% target."
All of this supports the argument that the Fed will begin tightening monetary policy with interest rate hikes sooner than later. A rate hike from the Fed, which could come as soon as September 17, would be the first hike since June 2006.
"With inflation low, we can probably remove accommodation at a gradual pace," Fischer added. "Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2% to begin tightening."
"Mr Fischer, in a nutshell, gives the impression of being inclined towards an earlier start to the rate hiking cycle than a later one, while emphasizing the gradual nature of the moves," Societe Generale's Kit Juckes said.
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