Fed Vice Chairman Stanley Fischer over the weekend laid out the rationale for raising US interest rates in the near future, perhaps as early as next month. His reasoning boils down to two main arguments. One, “the economy has continued to recover and the labor market is approaching our maximum employment objective.” Meanwhile, inflation is still low—“persistently below” the Fed’s 2% target, he recognized in a speech on Saturday. But that won’t last, he explained, advising that “there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further.”

Encouraging numbers on the economy generally and the labor market in particular of late arguably support the case for tighter monetary policy. But inflation isn’t playing along, at least not so far. But to think like a central banker, it’s essential to limit one’s view of the world by looking into the rear-view mirror, Fischer reasoned. As such, his expectation that pricing pressures will soon strengthen is critical for making the case for a rate hike. Why not wait until the evidence is overwhelmingly clear? Because, he explained,

monetary policy influences real activity with a substantial lag [and so] we should not wait until inflation is back to 2 percent to begin tightening. Should we judge at some point in time that the economy is threatening to overheat, we will have to move appropriately rapidly to deal with that threat. The same is true should the economy unexpectedly weaken.

In any case, Fischer was careful to point out that the timing of the first rate hike since 2006 remains an open question. The next and perhaps last major data point that could influence if the Fed will start squeezing rates at its Sep. 16-17 policy meeting is this Friday’s employment report.

The average monthly rise of 235,000 for nonfarm payrolls through July is “well above the amount needed to continue the strengthening of the labor market,” Fischer said in his Saturday speech. Based on Econoday.com’s consensus forecast, the headline data for the August payrolls is on track to increase by 223,000, which is also the implied three-month average through this month. In other words, not much is expected to change on the employment front, which means that Fischer’s evaluation that labor market conditions are improving will likely remain intact, or so it seems.

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