Stanley Fischer, the Fed’s second-in-command, appeared to lay the groundwork for a less predictable future of monetary policy, where economic data and unexpected geo-political risks could prompt the Fed to raise, or lower rates on the run.

Explicit policy promises, he said, would play less of a role.

“Whatever the state of the economy, the federal funds rate will be set at each FOMC meeting,” Fischer said in remarks at The Economic Club of New York.

The Fed last week took another step in preparing the market for its first rate hike since 2006, but its dim economic forecast and dovish comments from Fed Chair Janet Yellen signaled that the central bank would not be prepared to move until later in the year.

“It is well expected that the rate will lift off before the end of this year,” Fischer, a close ally of Fed Chair Janet Yellen, said in prepared remarks.

Fischer cited significant economic progress and a labor market that was nearing full employment. In upbeat remarks, he did, however, say that the strong dollar may offset some benefits of monetary accommodation.

Fischer said the tightening would come “when there has been further improvement in the labor market and we are reasonably confident that inflation will move back to our 2% objective over the medium term.”
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He added that a smooth series of future rate rises “will almost certainly not be realized, because, inevitably, the economy will encounter shocks.” He stressed that the Fed would be considering moving its key policy rate “up and down” in the future.

Fischer said he expected the Fed’s tools for tightening would be adequate, though tools, such as its overnight reverse repurchase program (ON RRPs), contained risks.

“For example, a large and persistent program could have unanticipated and adverse effects on the structure of money markets,” Fischer said, explaining that in times of stress, flight to quality demand for the program could disrupt money flows.