Fed's Fischer Sees Low Unemployment Lifting Wages, Inflation

(Bloomberg) -- Federal Reserve Vice Chairman Stanley Fischer, who leaves office this month, continues to expect a tightening U.S. labor market will lift wages and prices even though the process could take longer than anticipated.

“I still believe we will have higher inflation,” Fischer said Wednesday in an interview with Tom Keene on Bloomberg Television. “The basic mechanism here is unemployment is declining all the time, wages will start going up at some stage.”

Fischer, who has announced he’ll depart the Fed on or around Oct. 13, leaves a central bank that’s wrestling with a mystery over why price pressures have remained weak despite the lowest levels of unemployment in 16 years.

“The experience many of us have, including myself, is you have to wait a long time -- usually longer than you expected to wait -- for something to happen,” said Fischer, who surprised Fed watchers in September by announcing he would leave the central bank this month, several months before his expected departure. “But then, if it’s a very basic force, namely increasing employment, increasing wages, it’ll show up.”

Inflation measured by the Fed’s preferred price gauge was 1.4 percent in the 12 months through August and has been below its 2 percent target for most of the past five years. The jobless rate stood at 4.4 percent in August.

The Fed slashed interest rates to zero during the financial crisis and has only hiked four times since beginning its tightening cycle in December 2015, including in March and June, with another move forecast before the end of this year.

‘The Miracle’

Fischer said low rates had been less successful than the central bank had expected, though they had done a very good job of encouraging employment.

“The miracle of this recovery is the crisis did not generate long-term, massive unemployment. We’re basically back to something close to full employment,” he said.

Fischer was appointed by President Barack Obama in 2014 to a term as vice chairman that expires in June.

Fischer will depart the Fed just as Randal Quarles appears poised to join the central bank as vice chair for supervision. His nomination is pending confirmation in the full Senate, with a vote scheduled for Thursday.

That will still leave three vacancies on the central bank’s Board of Governors. In addition to filling those posts, President Donald Trump can complete a reshaping of the Fed’s leadership if he nominates someone else as chair when Janet Yellen’s term expires in February.

Fischer declined to discuss who Trump might chose to lead the Fed, but emphasized that a successful chair required “the flexibility of mind to see that he or she needs to take a different route” if the economy behaved in an unexpected manner, and also have the “capacity to lead a very large, very complex committee -- the Open Market Committee -- to agree with his or her thoughts.”

He leaned against the notion that monetary policy can be conducted solely with formulas or rules.

“We always need to be steeled for the possibility that we need to change course drastically.”

To contact the reporters on this story: Alister Bull in Washington at abull7@bloomberg.net, Christopher Condon in Washington at ccondon4@bloomberg.net.

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Randall Woods