Fischer says Fed trying not to surprise markets at liftoff

[WASHINGTON] Federal Reserve vice chairman Stanley Fischer said the central bank has done its best to prepare international markets for its first interest rate increase since 2006 and reiterated that no decision has been made yet about the precise timing of liftoff.

"In the relatively near future probably some major central banks will begin gradually moving away from near-zero interest rates," Mr Fischer on Thursday told the Asia Economic Policy Conference Thursday at the Federal Reserve Bank of San Francisco.

"We have done everything we can to avoid surprising the markets and governments when we move, to the extent that several emerging market (and other) central bankers have, for some time, been telling the Fed to 'just do it.'"

The Fed has held interest rates near-zero since 2008 and is contemplating lifting them as the job market heals and policy makers gain confidence that inflation will accelerate toward their 2 per cent goal. The move could have big implications for other nations and comes at a time when Asian growth is slowing.

In his remarks, Mr Fischer said that even as Asia slows and China in particular rebalances toward domestic consumption, the nation is likely to continue to grow faster than the rest of the world and play an increasingly important role in the global economy.

"China is for some time likely to continue to grow faster than the rest of the world and thus to produce an increasing share of global output," he said, adding that it's probable that "its growth will result in its playing a more decisive role in the international economy and in international economic institutions." He also said that the slowdown is Asia is likely to have persistent effects on some commodity prices, which have plummeted this year, though the long-term outlook for how the region will affect oil prices is less certain.

"Declining investment rates in emerging Asia, particularly China, present the prospect of a prolonged decline in the growth rate of commodity demand," he said. "And prices could remain low for quite some time, which seems particularly true for metals, such as copper and steel, used heavily in construction and investment." Mr Fischer noted that China's oil consumption remains far below that of developed markets and that oil use tends to increase with wealth.

"Further income growth in China has the potential to provide strong support for the oil market in the coming years," he said.

Mr Fischer also raised the 'likely' inclusion of China's yuan into the basket of global currencies used for the International Monetary Fund's Special Drawing Rights as a potentially important development.

IMF staff have recommended the yuan be included in the fund's SDR reserve-currency basket, alongside the dollar, euro, pound and yen, making approval by the fund's board this month all but certain.

Mr Fischer later explained during a question and answer session with the audience that in addition to the symbolic value of the move, it would also be an incentive for China to keep improving its financial markets.

"It is seen by the outside world as an initiative that will help maintain attempts to increase the efficiency of the capital markets in China," said Mr Fischer, himself a former first deputy managing director of the IMF. "There are many areas in which China can, without much danger, liberalise some capital controls and some other elements of the system."

BLOOMBERG