Investing.com – Federal Reserve (Fed) vice chair Stanley Fischer commented on Friday that he saw a strong case for gradual policy tightening and believed that the approach would help mitigate risks to foreign economies.
“The case for removing accommodation gradually is quite strong,” Fischer said in a speech delivered Friday at the 20th annual conference of the Central Bank of Chile.
The number two at the Fed noted that major foreign economies and emerging markets were at a different point in this business cycle which would likely require a high level of accommodation for some time, resulting in what he considered would be a “considerable policy rate divergence for some time”.
Fischer downplayed the negative effects of this divergence and suggested that many of the U.S. trading partners could receive a net boost to their economic growth although he admitted that there was uncertainty involved.
“To illustrate, a noticeably faster U.S. recovery would require a more rapid removal of U.S. accommodation and could exert noticeably larger spillovers abroad by putting more upward pressure on foreign interest rates and by inducing larger depreciations of foreign currencies,” he said.
Despite that admission, Fischer confirmed that he was “reasonably confident that the spillovers from ongoing U.S. monetary policy normalization will generally prove manageable for foreign economies.”
Fischer also explained that the current prospects for U.S. economic expansion suggested that the Fed should proceed with a gradual removal of accommodation.
“Such a gradual approach to tightening policy will also help mitigate the risk of undesirable spillovers abroad--including by reducing the risk of having to tighten more abruptly later on--and in turn promote a stronger global economy,” he concluded.
Markets currently put the odds of a Fed rate hike in December at 81.1%, according to Investing.com’s Fed Rate Monitor Tool.