The Federal Reserve’s eventual rate increase, the first since 2006, will not damage the global economy, Federal Reserve Vice Chairman Stanley Fischer said on Saturday.
While there could be “trigger further bouts of volatility” in international markets when the Fed first hikes, “the normalization of our policy should prove manageable for the emerging market economies,” Fischer said in a speech at the International Monetary Fund’s annual meeting.
Fischer also played down concern about the recent fall of the euro, which has fallen more than 8% against the dollar since the beginning of the year.
“We were all surprised for how long the euro stayed as high as it did, so to turn around and say that terrible things are likely to happen — I think, what is happening now is reflective of the underlying strengths of the economy,” Fischer said.
There was a sharp selloff of emerging market currencies and assets last year after the Fed first publicly discussed the possibility of ending its bond-buying program, otherwise known as quantitative easing.
Some experts, notably Reserve Bank of India Governor Raghuram Rajan, have worried publicly that the Fed could derail the global economy if it doesn’t look outward before it raises domestic interest rates.
Since last year, Fischer said, the Fed has “done everything we can, within limits of forecast uncertainty, to prepare market participants for what lies ahead.”
The Fed has been as clear as it can be about the future course of its policy course, and markets understand, Fischer said.
“We think, looking at market interest rates, that their understanding of what we intend to do is roughly correct,” Fischer said.
It makes no sense for the Fed to telegraph its moves to emerging markets sooner, he said.
“If anybody thinks our next move is a decline in the interest rate, they haven’t been reading. They know what the next move will be,” he said.
The U.S. central bank has said it plans to end its bond-buying program known as QE3 later this month.
And key allies of Fed Chairwoman Janet Yellen on the Fed, including William Dudley, the president of the New York Fed, have signaled they intend to raise interest rates around the middle of 2015.
Weakness in foreign markets could impact the pace of the Fed’s rate hikes, Fischer said.
“If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” Fischer said in a speech at the International Monetary Fund as part of its annual meeting.
Fischer said the U.S. cannot ignore developments beyond its borders, especially given that the dollar is the primary international currency.
Swap lines are still in place with central banks in major financial markets to provide enough dollars to meet demand, he noted.
“Although usage is currently very low, these facilities represent an important backstop in the event of a resurgence in global financial tensions,” he said.