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Fed's Kaplan: Three rate rises this year 'still a good baseline'

21 April 2017

Federal Reserve Vice Chairman Stanley Fischer painted a picture of a brightening global economy that can better manage the spillover of gradual monetary tightening in the U.S. "A gradual and ongoing removal of accommodation seems likely both to maximize the prospects of a continued expansion in the US economy and to mitigate the risk of undesirable spillovers overseas", Fischer added. "Foreign economies are likely to benefit from the developments that induce" the US central bank to tighten, he said.

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 USA central bank's gradual approach should keep spillovers to foreign countries in check. His prepared remarks were released by the central bank for a speech it said was closed to the media.

The Fed has already raised its benchmark interest rate once this year, by a quarter percentage point at its last policy meeting in March. That divergence is widely expected to strengthen the dollar, making it more hard for non-U.S. companies that issue dollar-denominated debt.

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Investors are questioning the strength of the U.S. economy and the Fed's plan to raise rates three times this year after a weaker-than-expected jobs gain last month and a surprise monthly drop in consumer prices.

"Three rate increases this still a good baseline".

"It's hard to argue that the kiwi should be stronger given that we expect growth to tail off this year, and as the U.S. economy builds momentum and policy there normalises, but equally, it's hard to be bearish given New Zealand's respectable credentials".

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Kaplan said that he thought this year could be appropriate to take action to reduce the size of the Fed's portfolio.

"Foreign output expansions appear more entrenched, and downside risks to those economies noticeably smaller than in recent years", he said. He says there's a chance foreign economies kick into gear enough that US and foreign business conditions become aligned, as they did during the tightening cycles that began in 1999 and 2004.

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Fed's Kaplan: Three rate rises this year 'still a good baseline'