Vice chair: Global concerns led Fed to keep rates unchanged

WASHINGTON – A top Federal Reserve official said Monday that increased concerns about the global economic outlook led the central bank to leave a key interest rate unchanged last week.

Vice Chairman Stanley Fischer said persistent declines in the price of oil and other commodities and developments in China appear to have triggered increased volatility in global financial markets.

But he said it was too soon to say whether the heightened volatility will affect global growth and the U.S. economy. He said the Fed is closely monitoring these developments.

In remarks to the Council on Foreign Relations in New York, Fischer said he can’t say when the Fed will raise rates again. But he stressed that the Fed still thinks that rate increases, whenever they do resume, will be gradual.

“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,” Fischer said.

The Fed’s future policy actions, he stressed, will be “data dependent.”

At its meeting last week, the Fed left its benchmark rate unchanged in a range of 0.25 per cent to 0.5 per cent. Six weeks earlier, the Fed had boosted that rate by a quarter-point after leaving the rate unchanged at a record low near zero for seven years.

Fischer said that since the December rate increase, further declines in oil prices and a further strengthening in the dollar have suggested that inflation will likely remain low somewhat longer than the Fed had previously expected. To help determine when and how quickly to raise rates, the Fed has said it will monitor whether inflation is advancing toward its 2 per cent target.

Many economists had expected the Fed to raise rates four times this year. Now, some say it may decide that economic conditions will warrant only two rate hikes in 2016.

In his remarks, Fischer said that with its benchmark borrowing rate very low and likely to rise only gradually, he could see benefits to maintaining a larger Fed balance sheet for some time. He said the bigger balance sheet would help reduce the risks to the economy from any future shocks.

The Fed’s balance sheet includes its holdings of long-term bonds that it bought to try to help reduce borrowing rates. The balance sheet stands at a record level of $4.5 trillion — four times its size before the financial crisis erupted in 2008.