Fed vice chair indicates September rate hike still possible

Before the recent turbulence in financial markets, there was a "pretty strong case" for starting to hike rates in September, Fischer said in an interview with CNBC. But he stressed that the Fed is watching how events unfold following the surprise Aug. 11 move by China to devalue its currency.

The Chinese action has roiled markets around the globe because it raised concerns that the world's second largest economy is sliding into a steeper-than-expected slowdown that could threaten global growth.

Fischer said that the Chinese slowdown was unlikely to have major direct impact on the U.S. economy. But it could ultimately hurt the U.S. if it dragged down the rest of Asia.

Central bank officials have not made a decision yet on whether to raise rates, Fischer said. But he added that they will be closely following data such as next week's jobs report and market moves before the Sept. 16-17 meeting.

The Fed has not raised interest rates in nearly a decade, and its key rate has been at a record low near zero since December 2008.

Fischer reiterated that once it begins raising rates, the Fed plans to move very slowly and gradually. He said the first hike would likely be a quarter-point increase followed later by another quarter point move.

"We are adjusting the knob slightly," Fischer said, noting that rates would remain at historically low levels that will continue to provide support through low borrowing costs for consumers and businesses.

The immediate market reaction to Fischer's comments sent stock prices down slightly and pushed the dollar up — signals that traders were interpreting Fischer's remarks as boosting the likelihood of a September rate hike.

Fischer said his "level of confidence is pretty high" that U.S. inflation will move back to the Fed's preferred target of 2 percent annual prices increases. The big drop in energy prices, which has been a major factor keeping inflation below target, was a temporary factor, he said.

Fischer was interviewed in Jackson Hole, Wyoming, where central bank officials from around the world are attending an annual conference sponsored by the Federal Reserve Bank of Kansas City. Fischer is scheduled to deliver a speech on inflation to conference participants on Saturday.