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KNOXVILLE, Tenn. — The rising cost of labor may drive interest rates higher, but the hike isn’t likely to affect overall economic stability, a University of Tennessee economist said Friday.

Dr. Matt Murray, head of UT-Knoxville’s economics department, said that any rate increase imposed by the Federal Reserve Bank would likely be modest. Fed chairman Alan Greenspan has hinted at an increase in interest rates.

“With the tight labor markets, labor costs are accelerating,” Murray said. “That’s causing financial markets to increase their expectations of an interest rate increase.”

Murray said a rate hike is not likely to have any serious negative consequences statewide or nationwide.

“It surely would drive up the cost of borrowing funds for both individuals and businesses and put a little bit of a dampening influence on buying,” he said. “But a rate hike is likely intended to send a psychological signal to the markets.”

Murray said the stock market has already experienced an upward drift in market interest rates, possibly in anticipation of slower growth.

“We are likely to see greater volatility simply in terms of the up and down movement of the (stock) index itself, largely because of the high level of the index,” he said. “But we’ll not see anything like the volatility that results from true psychological panic.

“The markets are stable, solid.”