Comments on Stanley Fischer’s Speech 01022016

From Stanley Fischer,

At our meeting last week, we left our target for the federal funds rate unchanged. Economic data over the inter-meeting period suggested that improvement in labor market conditions continued even as economic growth slowed late last year. But further declines in oil prices and increases in the foreign exchange value of the dollar suggested that inflation would likely remain low for somewhat longer than had been previously expected before moving back to 2 percent. In addition, increased concern about the global outlook, particularly the ongoing structural adjustments in China and the effects of the declines in the prices of oil and other commodities on commodity exporting nations, appeared early this year to have triggered volatility in global asset markets. At this point, it is difficult to judge the likely implications of this volatility. If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy. As the FOMC said in its statement last week, we are closely monitoring global economic and financial developments and assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.

Now, I expect that in a few minutes one of you will ask not about what we did at our last meeting, but rather what we are going to do at the next one. I can’t answer that question because, as I have emphasized in the past, we simply do not know. The world is an uncertain place, and all monetary policymakers can really be sure of is that what will happen is often different from what we currently expect.

According to Fischer, the core inflation number is at 1.4% and the Fed is close to the employment goal.

With regards to the recent volatility, I wonder how the FOMC makes the judgement of whether a period of volatility will leave a permanent or temporary imprint, or how big the impact is on the U.S. economy, or tell the difference in financial developments, between what is real and what is animal spirit?

I don’t think it is as straightforward as looking at the data. It is very well to be ‘scientific’ on making policy decisions, but it is the process of data inference that needs to be explained.

The phrase ‘balance of risks’ also needs to be spelled out. What are the risks and their rankings of urgency? What kind of stability is aimed for? Simple enough questions but difficult to answer if you divide them into their various complexities.

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