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Fed's Quarles downplays market volatility, says US economy is 'much improved'

Randal Quarles, the Federal Reserve's vice chairman for supervision, downplayed market volatility over the past few weeks, saying there is a "growing sense of economic optimism" in the U.S. and that gradual rate hikes would be needed to keep the current expansion going.

Quarles, in a speech at the International Financial Symposium in Tokyo, said the economy is in the best shape since the financial crisis — and in some ways even better than before the recession.

"Recent volatility in equity markets is a reminder that asset prices can move rapidly and unexpectedly," he said, according to prepared remarks. "However, it is my assessment that the underlying fundamentals of the U.S. economy are sound and much improved relative to earlier in the decade."

Citing the U.S. unemployment rate of 4.1%, Quarles said much of the slack in the labor market has gone away and more people are deciding to come back to the labor force. GDP growth, he added, has been picking up as consumers and businesses gain more confidence.

"It might be early, but it is possible that the investment drought that has afflicted the U.S. economy for the past five years may finally be breaking," he said.

The recently passed tax law, he added, could also help boost demand, encourage investments and push up the labor force participation rate.

Quarles also said he is not too concerned about inflation readings falling below the Fed's 2% target. He said those misses are likely attributable to temporary factors that should subside throughout the year. He called for further gradual hikes in the federal funds rate, saying they would help "both sustain a healthy labor market and stabilize inflation" around the 2% target.