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NEW YORK (Reuters) - The U.S. economy could suffer, with inflation remaining too low, if recent volatility in financial markets persists and signals a slowdown in the global economy, the Federal Reserve's second-in-command said on Monday.
Fed Vice Chairman Stanley Fischer, however, warned about jumping to conclusions given that some past bouts of financial market turbulence have not harmed the world's largest economy.
His speech, less than a week after the Fed held interest rates steady, appeared to reinforce the view that a month-long plunge in world stocks and oil prices could stay the U.S. central bank's hand as it looks to continue raising rates this year.
"At this point, it is difficult to judge the likely implications of this volatility," Fischer told the Council on Foreign Relations in New York.
"If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States," he added. "But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy."
The Fed hiked interest rates by a quarter of a percentage point in mid-December, its first tightening in nearly a decade. At the time it published forecasts suggesting four more hikes were to come in 2016.
Then, through much of January, markets were turbulent on weakness in China and elsewhere that raised concerns of a global economic slowdown. These worries grew on Monday when data showed monthly Chinese manufacturing activity shrank at its fastest pace in almost three-and-a-half years.
Over that time, Fischer said, oil price drops and the dollar's rise suggested inflation "would likely remain low for somewhat longer than had been previously expected" before moving back to the Fed's 2 percent target.
Fischer, a close ally of Fed Chair Janet Yellen, said he still expects inflation to hit its target over the "medium term" as pressures from oil and the dollar fade.
Traders in futures markets now expect the Fed to raise rates only once this year, most likely in November or December.
Though he is more of a centrist at the Fed, Fischer gave two other hints on Monday that his thinking has shifted dovish: he said there is "some benefit to maintaining a larger balance sheet for a time" to support the economy. The central bank's portfolio of bonds is worth about $4.5 trillion after years of post-crisis stimulus.
Fischer also argued that a "modest" drop in unemployment below its current 5.0 percent level, which is around the Fed's target, would be "appropriate" to help under-employed workers and to boost inflation, which is 1.4 percent by the Fed's preferred measure.
Yet the central bank should avoid a "large" overshoot of its employment target, he said.
Reporting by Jonathan Spicer; Additional reporting by Ann Saphir; Editing by Chizu Nomiyama