Stock Market

Fed yet to decide on hike; China not a concern: Fischer

Stanley Fischer, Vice Chairman of the US Federal Reserve says the Fed still has two weeks to decide on rate hike and would wait for the incoming economic data before taking a call.

“We have got time to wait and see the incoming economic data (expected next week) and see what is going on now in the economy,” he told CNBC.

Fischer says the decision will be made in the face of ‘considerable uncertainty’ considering the volatile global economy. However, he says as and when the Fed hikes rate, it will be a gradual process.

“The first move presumably will be from zero to 25 basis points and then 25 to 50, which means that our interest rate will still be below the British rate,” he adds.

He says: “Market volatility does affect the timing of a decision you might want to make.” However, he expects a reverse in the current global situation soon.

Fischer told CNBC that even at zero level, the US economy is fairly doing well with probability of rise in inflation to 2 percent soon. The abrupt fall in Dow last week was a reaction to the crash in Chinese market, he says adding that: “It was a reaction to something, which had potential to be very big.”

Minor devaluating in Chinese currency and appreciation in dollar will have very little impact on the US inflation, he adds.

He adds that China’s economy will have minute impact on US exports. The cause of concern, he says, is the “interactions among China and other countries will amount jointly to something that would have an impact on us.”

Below is the transcript of Stanley Fischer’s interview with CNBC’s Steve Liesman on CNBC-TV18.

Q: Earlier this week, New York Fed President Bill Dudley called the case for a September rate hike less compelling. Would you agree with him?

A: I think it’s early to tell. The change in the circumstances, which began with the Chinese devaluation, is relatively new and we are still watching how it unfolds. So I wouldn’t want to go ahead and decide right now what the case is. More compelling, less compelling, etc.

Q: I didn’t get a chance to interview Bill, so my question to you then is did you find the case for September previously to be compelling?

A: There was a pretty strong case. But it was, you know, was not a conclusion yet. It was a case.

Q: Let’s talk about some of the factors that have been out there. First of all, how do you process the recent market volatility? Some have blamed it squarely on the Federal Reserve and their policy and this hint that perhaps some accommodation could be taken away. Do you connect the dots from fed policy and possible withdrawal to the recent market gyrations?

A: No. I think there were things happening abroad particularly, which had a significant impact and that’s where I would start looking.

Q: You talked about the Chinese devaluation. That combined with lower commodity prices and a stronger dollar – is it your sense that this would reduce US inflation in the months ahead?

A: If the relatively small depreciation, which happened with the Chinese devaluation, with the relatively small appreciation, it will have some small impact. But, I think we have still got to wait and watch and see how this turns out.

Q: We got some personal consumption expenditures (PCE) numbers this morning, 1.2 percent on the core year over year. Where is your level of confidence that we are moving back towards the 2 percent target?

A: My level of confidence is pretty high. Because we are looking still at a period in which we have had significant reductions in energy prices, oil particularly, and we have still got the changes in import prices working themselves through the economy. So, we have got factors which will go away in awhile that are keeping the rate down.

Q: If those factors are transitory and you have confidence that they are transitory, should that then not stop you from taking action on rates, because you are confident that these will go away.

A: That’s the case – those who want to move now make and then others say we’ll be sure. We don’t have a whole lot of inflation going on, so we don’t have to move immediately. Those are the two sides of the argument that is taking place. It’s not an argument, it’s a discussion.

Q: Do you see dangers of remaining at the zero lower bound too long? Do you feel those dangers are increasing?

A: We haven’t seen much evidence of those dangers increasing. We are obviously watching them very carefully because we are being told all the time that they are there, but we haven’t seen them in a major way.

I think there is another case – this economy has come back to something close to full employment. A large percentage of people believe that inflation will return to the target range, the target of 2 percent. The economy’s working pretty well.

You see that all the time, you see that particularly in the ability to absorb unemployed which has been going on steadily for six-seven years – that we are getting back to normal and at some point we will want to show that by beginning to normalize interest rates.

Q: Does the market volatility itself give you pause and influence the process of making that decision?

A: If you don’t understand the market volatility and I am sure we don’t fully understand it now – there are many, many analyses of what’s going on. Yes, it does affect the timing of a decision you might want to make.

Q: So it would be a process of letting things settle down a bit before you came to a conclusion?

A: Yes, but I think they could settle fairly quickly. There is that possibility. We will know that they have settled down when they settle down.

Q: It’s sort of interesting the last couple days, you had this huge – our research showed that we moved 10,000 points in the Dow, but some of that was up and some of that was down. It seems like a lot of sound and fury, doesn’t it?

A: It was a reaction to something which had the potential to be very big, and which we are still looking at. China has become the second largest economy in the world.

Q: How does the Chinese economic slowdown in your estimation? How will it affect US economic growth?

A: The direct effect is reasonably small on our exports. It’s not very big. The concern is that if there are a lot of countries influenced by trade with China. China is a major trading country. East Asia particularly is associated with that. The question is whether interactions among those countries will amount jointly to something that would have an impact on us.

Q: When we had a chance to chat in February, you were fairly blunt, as sometimes you are. You said it’s time to raise rates.

A: I said that?

Q: You said that. I can get you the quotes, but my guess is you wouldn’t disagree. Do you still feel that way?

A: I think we are heading in that direction. What’s happening in particular with the labour markets and we will have to see if that continues when we get the data for next week. It has been impressive and the economy is returning to normal. We are not certain, we are there yet.

Q: So I think everybody’s going to want to know an answer to maybe a more direct question, if you don’t mind – which is September, when I hear you talking, is still alive as a possibility for raising rates?

A: We haven’t made a decision yet and I don’t think that we should make a decision. We are dealing with something which happened about ten days ago, particularly the change in the circumstances. We have got a little over two weeks before we make the decision and we have got time to wait and see the incoming data and see what exactly, what is going on now in the economy.

Q: I think it’s fair to push back on that, and say it’s a monumental decision. You haven’t raised rates in nine years. Should it really depend on the data in the next two weeks?

A: We have got to take data into account. Those are the only things we really have, that and our economic analysis. And if a decision is close, it will be influenced by data that come in recently.

Q: Wouldn’t you think there would be an overwhelming case though in one way or the other that you would be sure and confident that look, there’s this, you know, unimpeachable case that it’s time to go forward?

A: When the case is overwhelming, if you wait that long, you will be waiting too long.

Q: So it’s always a bit of a confidence in –

A: There is always uncertainty and we just have to recognize it. We will have to make a decision in the face of considerable uncertainty. But, in the knowledge also that we are beginning a process that we anticipate when we do it will be relatively slow.

The first move presumably will be from zero to 25 basis points and then to 25 to 50, which means that our interest rate will still be below the British rate. And they are regarded as doing quantitative easing, etc, etc. so we are not moving from a wonderfully extremely expansionary in monetary policy to a tight one. We would be adjusting the knob slightly and will probably wait awhile before doing something else.

Q: What about concern that what the market would do is immediately price or bring forward the whole trajectory of rates and so that rather than looking at just a 25 basis point increase in the borrow in cost for corporations, you are looking at a much larger one?

A: We have to consider all the possible market reactions. The market anticipates now a lower or at least recently, a lower part for interest rates than the committee does. So, we expect when this begins, there may be some adjustment.

But we are doing our best to make sure that the market understands and everybody understands we do not intend doing a rapid rate of increase. We can’t promise that won’t happen – it will depend on the circumstances. But our assumption is it’s going to be gradual.