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November 12, 2016

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Fed may proceed to gradual rise in interest rates

US economic growth prospects appear strong enough for the Federal Reserve to proceed with a gradual increase in interest rates, Fed Vice Chair Stanley Fischer said yesterday in his first remarks since the election of Republican Donald Trump as US president.

The US central bank’s second-in-command said the Fed was “reasonably close” to achieving its employment and inflation goals, and the case for tightening “quite strong” as a result.

“In my view, the prospects of a continued steady expansion in the US economy are maximized to the extent that we proceed with a gradual removal of accommodation,” Fischer said in prepared remarks to a central banking conference in Santiago, Chile.

Not doing so runs the risk of having to tighten monetary policy more abruptly later, he added.

Fischer did not mention the outcome of the US presidential election in his remarks. Some other Fed officials have welcomed the prospect of a unified government and new infrastructure spending after years of political gridlock in Washington that has curtailed longer-term growth prospects.

The Fed is widely expected to raise interest rates in December but has repeatedly warned that borrowing costs would rise very slowly over the next few years due to an aging population and slow productivity growth.

The benchmark overnight lending rate remains close to zero seven years after recession ended.

Fischer also said he was “reasonably confident” that spillovers from the Fed raising interest rates would prove manageable for foreign economies to which the US is interlinked by trade and financial channels.

However, he cautioned that should the US have to raise rates more rapidly it “could exert noticeably larger spillovers abroad by putting more upward pressure on foreign interest rates and by inducing larger depreciations of foreign currencies.”


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