May 9, 2018 / 7:39 PM / 2 months ago

Former Fed official Fischer worried by Iran, international tensions

LAS VEGAS, May 9 (Reuters) - Stanley Fischer, the former vice chairman of the U.S. Federal Reserve, said the Trump administration’s decision to pull out of the Iran nuclear deal and other geopolitical developments were cause for concern given the potential for international conflict.

“My internal VIX went up a lot,” Fischer said on Wednesday during the Context Leadership Summit in Las Vegas, a 750-person hedge fund-focused conference.

VIX refers to the CBOE Volatility Index, which measures expected volatility in the U.S. stock market. The VIX spiked in February amid a pullback in equities but has mostly declined since, including in May.

Fischer, who left the Fed in October, called the situation in the Middle East “very tough.” U.S. President Donald Trump on Tuesday pulled out of an international nuclear deal with Iran, raising the risk of conflict in the Middle East, upsetting European allies and casting uncertainty over global oil supplies.

“This is a problem that could lead to nuclear proliferation,” he said. “It’s a problem that could break the relations between the United States and Europe even more than they have been affected already.”

Fischer, speaking alongside Mohamed El-Erian, the chief economic adviser for Allianz, also cited concerns about looming tariffs by and on the United States. The world’s two largest economies are in a heated feud over U.S. tariffs on steel and aluminum and China’s retaliatory tariffs and port inspections.

“Trade wars in the past ended up with major economic negative consequences, and that could happen now,” Fischer said.

Fischer also discussed the potential negative effect on future economic policy of the recent U.S. tax overhaul that cut top corporate tax rates to 21 percent from 35 percent.

He said that future fiscal expansion would be “very difficult” and that the United States could one day be in a position where it could not float debt as easily.

“If people really were as worried about fiscal deficits as they should be, we wouldn’t have had a tax cut of this magnitude,” he said.

Still, Fischer said he was positive on the Fed leadership and indicated government interest rates were likely to rise given healthy economic indicators that traditionally lead to inflation, such as demand for labor and the supply of goods.

“I think if you are looking two to three years ahead in the capital markets you shouldn’t be ruling out numbers which are reasonable,” Fischer said, without specifying a number.

A U.S. 10-year Treasury bill currently yields around 3 percent.

Reporting by Lawrence Delevingne; Additional reporting by Svea Herbst; Editing by Lisa Shumaker

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