NEW YORK (Reuters) - The Federal Reserve is "very close" to its U.S. employment and inflation targets, Fed Vice Chair Stanley Fischer said on Monday, as he warned against making rash changes to the policy framework in an effort to boost economic growth.
Fischer, speaking to the Economic Club of New York, mapped out a world where low growth hamstrings central banks from effective recession-fighting, and said the U.S. economy may face longer and deeper recessions in the future if interest rates remain stuck at current low levels.
Asked about the notion of raising the Fed's inflation goal to 3 percent from the current 2 percent, the No. 2 U.S. central banker said he was "not enthusiastic" about such tinkering.
"We are very close to our targets" of maximum sustainable employment and 2-percent inflation, he said. "To change that target if you are so close, that's a problem."
The dollar and stocks fell slightly while U.S. Treasury yields added to earlier declines after Fischer's speech, in which he also said the Fed should not aim to overshoot its employment target with too much stimulus.
On Friday, long-dated bond yields also rose after Chair Janet Yellen said the Fed may need to run a "high pressure" economy to heal damage from the 2007-2009 recession.
The Fed raised interest rates from near-zero in December, its first monetary policy tightening in nearly a decade, and it has since stood pat as U.S. economic growth weakened, with risks seen to have grown overseas. Still, policymakers expect to hike rates again before year end.
San Francisco Fed President John Williams set off debate both within and outside the central bank when, over the summer, he floated the concept of lifting the inflation target to boost spending and investment.
"If some terrible fit of pessimism were to hit the economy we might find ourselves in deep trouble, but we are not there," Fischer said. "I'd be very reluctant to raise the inflation target at this moment."
Nonetheless, Fischer acknowledged that "having very low interest rates makes monetary policy more difficult," especially if faced with a recession.
Though Fed officials would still have tools such as quantitative easing and forward guidance if rates remain low, he said, "these alternatives are not perfect substitutes for conventional policy. The limitation on monetary policy imposed by low trend interest rates could therefore lead to longer and deeper recessions when the economy is hit by negative shocks."
However, it is "not that simple" for the Fed to coax interest rates higher in a world where, central bankers believe, an aging population, weak demand and low investment may have undercut the country's and the world's economic potential, Fischer said.
Many of the forces holding down growth, such as demographics, are beyond the reach of policy. And hopes of boosting productivity or investment may rest more with other branches of government that could boost spending at their discretion, Fischer said.
Fischer did not comment specifically on the likelihood of a rate increase at the Fed's November or December meetings.
He said he had tried to quantify the implications for monetary policy, and the results were not encouraging. A decline in longer-run trend growth in gross domestic product, for example, may have cut as much as 1.2 percentage points from the expected long-run federal funds rate.
Demographic trends, weak investment and slower overseas growth were pulling it down even more.
The closer that long-run rate comes to zero, the less room policymakers will have in the future to counter any downturn.
Writing by Howard Schneider in Washington, additional reporting by Lindsay Dunsmuir; Editing by Chizu Nomiyama and Bernadette Baum