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 Soft oil prices in particular, which hit a five-year low on Friday,
will only temporarily dampen overall U.S. prices, Fed Vice Chairman
Stanley Fischer and New York Fed President William Dudley said at
separate events. The pair painted a mostly rosy outlook for the
world's largest economy, suggesting the central bank is not letting
energy markets distract it from lifting rates some time next year.
"The lower inflation that we'll get from the lower price of oil is
going to be temporary," Fischer said at the Council on Foreign
Relations. "I wouldn't worry about that very much because that
period of negative, low inflation is actually happening as a result
of a phenomenon that's making everyone better off, and furthermore
likely to increase GDP rather than reduce it."
Dudley, who like Fischer is a close ally of Fed Chair Janet Yellen,
said the oil rout was a positive for the economy because much of the
extra money will be "spent, not saved" by Americans. The global
price drop will also encourage more monetary easing by other central
banks, spurring global growth, he said.
If the oil price drop were to "intensify and persist, this would
have negative implications for oil and gas investment" in the United
States, he added. "Nevertheless, there are several reasons why I
don't think this risk should be overstated, especially if oil prices
stabilize around current levels."
Crude markets rebounded on Monday but have fallen the last five
straight months, the longest losing streak since the crisis that
brought on the deep recession. Measures of inflation, which have
lingered below the Fed's 2 percent target for more than three years,
have recently softened, raising questions over the timing of policy
tightening.
"I remain confident, despite the recent softening, that inflation
will begin to move up towards our 2 percent objective next year,"
Dudley said at Baruch College. In a television interview later, he
downplayed worries over leverage in oil and gas exploration.
Elsewhere in New York, Fischer said the United States may be on the
verge of a long-awaited jump in wages that could signal the labor
market has begun to heal more fully. "I think that has a significant
chance of being about to happen," he said.
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U.S. wages have stagnated despite falling unemployment and decent
gross domestic product (GDP) growth, so the Fed is only cautiously
preparing to raise rates. It halted a bond-buying program in
October.
Dudley, who repeated it is reasonable to expect a rate hike in
mid-2015, said the Fed will not just tighten policy based on how the
economy is faring but also on how well financial markets respond to
the eventual hikes. More aggressive rate rises will be needed if
financial markets do not react as expected, and vice versa, he said.
Elsewhere, the dovish head of the Minneapolis Fed, Narayana
Kocherlakota, in a paper called on the central bank to rewrite its 2
percent inflation goal to reflect the view that below-target
inflation is just as costly as above-target inflation.
Asked about raising that target, Fischer rejected the idea.
(Additional reporting by Howard Schneider, Jason Lange and Ann
Saphir; Editing by Meredith Mazzilli)
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