By Jonathan Spicer and Michael Flaherty
NEW YORK (Reuters) - The Federal Reserve is "widely expected" to begin raising interest rates this year though the policy path remains uncertain, the central bank's second-in-command said on Monday, appearing to lay the groundwork for a less predictable future.
Fed Vice Chair Stanley Fischer said the stronger dollar and weak oil play a role in U.S. policymaking, but he stressed that the central bank is "trying to look through those phenomena."
Much of his speech to the Economic Club of New York focused on the period after rates rise from near zero, which Fischer said could be "June or September or some later date or some date in between." Afterward, he said, the Fed would tighten or even loosen on a meeting-by-meeting basis based on economic data and unexpected geo-political risks.
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 of the policy-making Federal Open Market Committee.
A smooth series of future rate rises "will almost certainly not be realized because, inevitably, the economy will encounter shocks," he added, stressing that the Fed would be considering moving its key policy rate "up and down" in the future.
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.
The news prompted many economists to shift their expectation of a tightening from June to September or later.
"It is well expected that the rate will lift off before the end of this year," Fischer said. "We will be moving from an ultra expansionary monetary policy to an extremely expansionary monetary policy."
His mostly upbeat remarks cited significant economic progress and a labor market nearing full employment. He did, however, say the rising dollar may offset some benefits of monetary accommodation.
The dollar and weak oil are putting downward pressure on already low U.S. inflation, which is staying the Fed's hand at tightening. Fischer said both are "transitory," and stressed "further improvement" in the labor market was also needed to hike rates.
Turning to the mechanics of tightening policy, Fischer said he expected the Fed's tools would be adequate, though some, 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.