Even with the rate hike and a median projection of four more in 2016, the Fed says the labor market will continue to strengthen and the unemployment rate will hover for multiple years below 4.9 percent, which is what the Fed thinks is the long-term norm.
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The Fed last month raised interest rates for the first time since the financial crisis, lifting its target range for short-term borrowing costs to between 0.25 percent and 0.5 percent.
Federal Reserve Vice Chairman Stanley Fischer speaks during a televised interview during the Federal Reserve Bank of Kansas City’s annual Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming August 28, 2015.
Mester said a weakening economy in China had already been built into the outlook for 2016 by Fed officials.
In his prepared text, Mr Fischer also discussed the role of financial stability in Fed decision-making.
In banking legislation passed in 2010, US lawmakers prohibited the Fed from engaging in rescues of individual financial firms, such as it did with Bear Stearns Cos. and American International Group Inc. during the last meltdown.
Fischer said this equilibrium rate, which is key to forecasting by how much the Fed will ultimately tighten policy, is now around zero and is likely to remain low for the “policy-relevant future”.
The debate over this rate appears set to be a defining focus for the Fed in 2016, as policymakers seek to raise rates quickly enough to head off the threat of inflation but slowly enough to keep the recovery from losing steam.
Cleveland Fed President Loretta Mester said the central bank is monitoring the potential dangers of overheating “as best we can”.
“I think this is an ongoing process that China is going through”.
“Right now, we do not see this as a significant risk”, she added at an AEA panel discussion with Feldstein on Sunday.
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It is long past time for the Federal Reserve to have started raising rates. I believe it will help the economy by signaling the eventual end to a policy that has distorted economic decisions for the past several years.
