WASHINGTON (Reuters) - A brighter global outlook has tempered any adverse market reaction to the Federal Reserve’s decision to raise rates twice in the last three months, Fed Vice Chair Stanley Fischer said on Wednesday, and the U.S. central bank’s gradual approach should keep spillovers to foreign countries in check.
“Even if monetary policy divergence remains substantial, there is good reason to think that spillovers to foreign economies will be manageable,” Fischer said in prepared remarks to a conference in Washington jointly organised by the International Monetary Fund.
The U.S. central bank raised its benchmark interest rate at its March meeting to a target range between 0.75 and 1 percent, continuing to step away from the historically low rates put in place in 2008.
With unemployment now at 4.5 percent and inflation slowly rising, many Fed policymakers have been increasingly confident about meeting the central bank’s forecast of a further two rate increases this year.
Fischer noted that in the Fed’s two previous tightening cycles in 1999 and 2004 U.S. and foreign business conditions became reasonably well aligned, and said “there may well even be some chance” of it happening again.
But he also acknowledged that the Fed’s decision to cut rates to near zero and hold them there for almost a decade had pressured asset prices and currencies in some emerging markets.
The Fed is raising rates while many other central banks are still providing extensive monetary accommodation.
That said, Fischer pointed to positive signs with unemployment in Europe falling and inflation moving towards central bank targets and the Chinese economy on more solid footing.
“The main reason for the positive market reaction is that foreign output expansions appear more entrenched, and downside risks to those economies noticeably smaller than in recent years,” Fischer said.
He added that he still expects the pace of U.S. rate increases to be gradual and that such an approach would be of benefit both domestically and abroad.
“A gradual and ongoing removal of accommodation 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,” Fischer said.
Reporting by Lindsay Dunsmuir; Editing by Meredith Mazzilli