Federal Reserve Vice Chairman Stanley Fischer said Saturday the U.S. central bank, which has been criticized for ignoring the impact of its policies overseas, is very much cognizant of the global repercussions of its actions.

Mr. Fischer, whose vast international experience at the International Monetary Fund and the Bank of Israel make him the Fed’s de facto diplomat, said an interconnected world economy makes it impossible for U.S. policy makers to assess the country’s economic outlook in a vacuum.

“The tightening of U.S. policy will begin only when the U.S. expansion has advanced far enough, in terms both of reducing the output gap and of moving the inflation rate closer to our 2% goal,” Mr. Fischer said at an event on the sidelines of the International Monetary Fund meeting.

“If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise.”

As the Fed approaches the time for eventual interest rate increases after more than five years of keeping borrowing costs at effectively zero, Mr. Fischer said the Fed will remain very much aware of the potential international repercussions of higher U.S. interest rates.

“In the normalizing of its policy, just as when loosening policy, the Federal Reserve will take account of how its actions affect the global economy,” he said.

He stressed the importance of clear and continuous communication to make both financial markets and foreign authorities aware of likely of coming changes. But Mr. Fischer also pushed back against calls for even greater specificity about the timing of an eventual interest rate increase.

“What we intend to do is pretty clear from our statements. We can’t be more precise because of the data – we don’t know what we will do,” he said.

Mr. Fischer’s remarks represent a small step away from former Fed Chairman Ben Bernanke’s more confrontational tone when asked about the international effects of Fed policy. Mr. Bernanke, who was criticized repeatedly by foreign ministers arguing the United States was pursuing a beggar-thy-neighbor policy of currency devaluation, would say simply that the Fed was an American institution with domestic objectives.

But Mr. Fischer, perhaps because of his years at the Bank of Israel, appeared more sympathetic to the plight of emerging economies.

“There is little doubt that the aggressive actions the Federal Reserve took to mitigate the effects of the global financial crisis significantly affected asset prices at home and abroad as well as international capital flows,” Mr. Fischer said.

Like Mr. Bernanke, however, Mr. Fischer argued countries with flexible exchange rates should have an easier time grappling with volatile capital flows.

Source: Wall Street Journal