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

By Lindsay Dunsmuir and Jon Herskovitz

(Reuters) - Dallas Federal Reserve President Robert Kaplan said on Tuesday he expects the U.S. 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," Kaplan said before an audience in Austin, Texas.

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

While China's slowdown would have a manageable impact on U.S. GDP growth, the interconnectedness of global finance as Beijing rebalances its economy toward consumption-led growth could cause further stress to the United States.

"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," Kaplan said. "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."

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.

In comments to reporters Kaplan declined to rule out a rate increase at the Fed's next meeting on April 26-27.

"I would make the point generally, I think it is a good practice to assume that all eight Fed meetings are live," he said.

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.

(Reporting by Lindsay Dunsmuir and Jon Herskovitz; Editing by Meredith Mazzilli)