Federal Reserve Vice Chairman Stanley Fischer said central bankers are weighing the risk of raising interest rates prematurely against the danger of having to play catch-up if they wait too long.
“Which is better, early and gradual or late and steep? If we raise the rate from zero it will be harder to go back to zero if there is a problem,” Fischer said Monday in a speech at IDC Herzliya in Herzliya, Israel.
The U.S. economy is emerging from a shaky first quarter. Payrolls grew by 223,000 in April after a March slump that was worse than initially thought while the unemployment rate fell to 5.4 percent, the lowest in almost seven years. Third quarter growth was just 0.2 percent at an annualized pace after a 2.2 percent gain in the final three months of 2014.
Fed officials led by Chair Janet Yellen are considering when to raise their benchmark lending rate, which almost all policy makers expect to occur this year, according to March estimates.
“Our processes are not date determined, they are data determined,” said Fischer, a former governor of the Bank of Israel. “So much importance is given to first move and it’s misleading.” The Fed’s first rate increase will be a matter of “going from an ultra-expansionary monetary policy to an extremely expansionary monetary policy.”
Separately, Federal Reserve Bank of Cleveland President Loretta Mester said the “time is near” for the central bank to raise its benchmark rate. The Fed’s rate-setting committee will go into its June meeting with an “open mind,” she said.
“We’ll get another employment report to look at as well as some other data and we’ll make a judgment at that meeting. In my mind every meeting is on the table,” she said in an interview in Reykjavik, Iceland. Mester will be a voting member of the Federal Open Market Committee next year.
The outlook for higher rates in the world’s largest economy has helped lift the U.S. dollar, which has climbed 18 percent since July 1 versus a basket of 10 leading global currencies.
Fischer, 71, joined the Fed a year ago. He led the Israeli central bank from 2005 to 2013 and before that was a vice chairman of Citigroup Inc. He was the International Monetary Fund’s No. 2 official from 1994 to 2001 and the World Bank’s top forecaster from 1988 to 1990.