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Fed's Kaplan says central bank should raise rates gradually and cautiously

[WASHINGTON] Dallas Federal Reserve President Robert Kaplan said on Tuesday he expects the US economy to prove resilient this year but that the nation's central bank should proceed gradually and cautiously in raising rates.

"We will ... power through, but there are issues over the horizon that have some downward impact on GDP, and will affect unemployment and inflation," Mr Kaplan said before an audience in Austin, Texas.

Mr Kaplan, who said before the last meeting of the Fed in March that he was downgrading his expected hike path, also sounded caution on the impact from abroad.

While China's slowdown will not have a big impact proportionally on US GDP growth, the interconnectedness of global financial linkages as Beijing rebalances its economy toward consumption-led growth could cause further stress to the United States.

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"Our bigger worry is as China goes through this very long transition, there will be periods where they have a devaluation or turmoil in terms of currency flight ... or turmoil in their markets. I am more concerned that will transmit very quickly to global financial markets and cause credit spreads here to widen, cause a flight to quality ... and also ripple through our markets," Mr Kaplan said.

He added that while he is confident the Chinese have the tools to manage its transition, some of what they are trying to do is unprecedented.

Fed Chair Janet Yellen also said earlier on Tuesday that the central bank should proceed "cautiously" in raising rates given global risks.

At its latest meeting two weeks ago, the Fed downgraded its estimate to two rate increases this year, down from four that was forecast at its December meeting.