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Fischer says temporary inflation factors still a Fed concern

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(Bloomberg) — Federal Reserve Vice Chairman Stanley Fischer said low U.S. inflation, while probably restrained by temporary factors, remains a concern as the labor market nears a sweet spot.

“A large part of the current inflation is temporary,” Fischer said in an interview Monday with Tom Keene on Bloomberg Television. After the effects of cheaper oil and other raw materials dissipate, “these things will stabilize at some point, so we’re not going to be as low as we are forever.”

Fischer’s remarks indicate that while he’s pleased with progress on employment, he may be waiting for signs inflation will start moving up toward the central bank’s target. The Federal Open Market Committee meets Sept. 16-17 for a gathering at which many investors and economists expect it will raise interest rates for the first time in almost 10 years.

“Employment has been rising pretty fast relative to previous performance, and yet inflation is very low,” he said. “And the concern about this situation is not to move before we see inflation, as well as employment, returning to more normal levels.”

Traders were pricing in a 52 percent probability that the Fed raises rates at the September meeting as of 3:54 p.m. New York time, based on the assumption that the effective federal funds rate will average 0.375 percent after liftoff. The odds were 54 percent late Friday.

Liftoff ‘Close’

In a speech Monday afternoon, Atlanta Fed President Dennis Lockhart said “I think the point of liftoff is close,” even if there’s no “foreordained date.” Lockhart, a voting FOMC member this year, told the Atlanta Press Club that “the incoming numbers will dictate the timing of the decision.”

In their statement after their July meeting, Fed officials said they believe an increase will be warranted once there has been “some further improvement in the labor market.” A Labor Department report Aug. 7 showed employers added 215,000 jobs last month, in line with the 211,000 average monthly gain so far this year. The jobless rate held at 5.3 percent, average weekly hours inched up and the underemployment rate edged down. The August jobs report is scheduled to be released Sept. 4.

Fischer, a former head of the Bank of Israel, acknowledged that inflation had become the greater concern for policy makers.

‘The Problem’

“The problem is not with the part that’s unusual in the dual mandate, namely employment, that’s doing just fine,” Fischer, 71, said. “It’s with the inflation part.”

The Fed is looking for signs that inflation will strengthen toward its 2 percent goal before it starts to increase rates. Policy makers’ preferred gauge of prices has been below target for more than three years, climbing by 0.3 percent in the year through June.

“I felt Fischer’s comments were a little more dovish than market expectations going in,” said Krishna Guha, vice chairman of Evercore ISI in Washington. “It certainly suggests that September is by no means a done deal.”

Guha said it was notable that Fischer suggested the Fed might engage in more monetary policy easing if inflation were its only mandate.

“It would be odd in that context to say, ‘I think we should hike in a few weeks time,’” Guha said.

Job Creation

Fischer also said the Fed’s “ultra-accommodative” policy over the past several years had worked.

“The low interest rates are designed to help the recovery,” he said. “In terms of employment, they’ve done that very well.”

Fischer said the Fed takes international economic developments into account, but its first responsibility is to tend to the U.S.

“Our duty specified in law is to the American economy,” he said. “Of course, what happens abroad affects us. If the rest of the works is slower, that’s not good for the U.S. economy.”

The European Central Bank is engaged in bond purchases designed to boost euro-area economies, and the Bank of Japan continued with unprecedented monetary stimulus earlier this month. China’s economy has slowed to its lowest level of growth since 2009.

Yellen has said an increase will probably be appropriate this year if the data evolve as expected. While the October FOMC meeting isn’t followed by a Yellen press conference, she has said a policy move is possible at any of the committee’s meetings.

St. Louis Fed President James Bullard told the Wall Street Journal in late July that “we are in good shape” for a rate increase in September. Bullard votes on policy in 2016.