Fed's Williams: Rate Increases Needed to Keep U.S. Economy on Sustainable Path
June 26 2017 - 1:29AM
Dow Jones News
By Michael S. Derby
Federal Reserve Bank of San Francisco President John Williams
said it is necessary for the U.S. central bank to press forward
with interest-rate increases, in part to reduce the risk that the
economy might overheat.
The main goal of monetary policy right now is "to keep the
expansion going as long as possible," Mr. Williams said in the text
of a speech to be delivered in Australia. "That entails bringing
monetary policy back to a more normal setting and taking actions to
keep the economy on a path that neither exceeds its speed limit,
nor stalls."
When it comes to the Fed's inflation and hiring mandates, the
economy is "as close to these goals as we've ever been," he said.
And while inflation has been weak lately, tepid readings are likely
to be temporary, with what is now a 4.3% jobless rate already under
the point at which it could start to fuel inflationary pressures,
Mr. Williams said.
"The very strong labor market actually carries with it the risk
of the economy exceeding its safe speed limit and overheating,
which could eventually undermine the sustainability of the
expansion," he said. "Gradually raising interest rates to bring
monetary policy back to normal helps us keep the economy growing at
a rate that can be sustained for a longer time."
Mr. Williams spoke in the wake of the recent Federal Open Market
Committee meeting that saw officials raise their short-term
overnight interest rate target range to 1% and 1.25%. Officials
also expect to raise rates one more time this year, and they have
laid out a plan to begin a slow drawdown of their $4.5 trillion
balance sheet later this year.
Mr. Williams is a close ally of Chairwoman Janet Yellen, who
said after the FOMC meeting the case remains strong to continue to
boost the cost of borrowing in the U.S. economy.
Other Fed officials have become more anxious, however. Two FOMC
voters, the leaders of the Chicago and Dallas banks, have said they
would need to see a pickup in inflation before they would support
another rate increase. Another voter, Neel Kashkari of the
Minneapolis Fed, argued the Fed's rate rise was a mistake given how
far short price pressures are of the Fed's 2% inflation goal.
Most Fed officials believe a strong job market would eventually
fuel higher inflation. Mr. Williams said in his speech he still
expects to see the U.S. reach the Fed's price target by next year.
Mr. Williams also said he expects the current jobless rate to
remain just above 4% through the next year.
The central bank veteran said the main goal of monetary policy
right now is to be "boring" and predictable and avoid rattling
markets. He said the Fed is cognizant of the impact of its policies
overseas as well.
Mr. Williams said that while the Fed doesn't know how much it
would like to shrink its balance sheet, it will nevertheless be
considerably smaller than its current size.
Write to Michael S. Derby at michael.derby@wsj.com
(END) Dow Jones Newswires
June 26, 2017 01:14 ET (05:14 GMT)
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