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April 30, 2017

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Rate hikes unlikely to roil world markets: Fed vice chair

WASHINGTON -- As the global recovery has taken firmer hold, gradual U.S. interest rate increases are unlikely to roil world markets or cause undue problems for policymakers, a top Federal Reserve official said Wednesday.

And as the U.S. central bank continues to raise the benchmark lending rate, it will be seen as a sign of confidence in the U.S. and global economies, Fed Vice Chair Stanley Fischer said in a speech.

Speaking to a central banking conference ahead of the International Monetary Fund's semi-annual meeting, he repeated the Fed's oft-stated view that rate hikes will be gradual, given current forecasts of the economy and inflation.

That pace "seems likely both to maximize the prospects of a continued expansion in the U.S. economy and to mitigate the risk of undesirable spillovers abroad," he said.

The Fed has raised the key interest rate twice since December, and two more are expected this year, to get ahead of modestly increasing inflation.

U.S. trading partners, especially in emerging markets, have had to combat the impact of U.S. monetary policy, especially when their economies are going in the opposite direction as the United States.

When the Fed was cutting rates sharply in the midst of the financial crisis, many emerging market economies were booming and raising rates, causing a massive influx of capital that fueled inflation in their countries.

With those economies now seeing slower growth and the U.S. recovering and raising rates, the concern is that they could see capital flood out of their economies.

But Fischer said those countries "have markedly improved fundamentals — including smaller current account deficits and more anchored inflation expectations — that should allow them to better withstand the effects of U.S. tightening, though some vulnerabilities remain."

In addition, a more solid recovery has taken hold in Europe and China, and so far fears of Brexit disruptions have not materialized, all of which have helped global markets have a more benign view of coming U.S. interest rate increases, the official said.

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