Fed's Williams Sees Three to Four 2018 Hikes Still Warranted
(Bloomberg) -- Federal Reserve Bank of San Francisco President John Williams said he’s “very positive” about the economic outlook both in the U.S. and abroad and reiterated that he views three to four interest-rate increases this year as appropriate.
Williams, who will take the helm of the New York Fed on June 18, said Tuesday inflation is nearing the central bank’s 2 percent target after a temporary slowdown last year and noted that unemployment is at its lowest since 2000, shoring up his confidence in the outlook.
Investors expect the Fed to raise borrowing costs for a second time this year when they meet in June and see the likelihood of three or four moves for the year as a whole as roughly balanced.
Describing inflation as “behaving itself,” Williams said he would not be too concerned if price pressures overshot the target by a few tenths of a percentage point.
“But obviously, if we see the inflation pressures, wage pressures, all starting to build, that would argue for a somewhat faster tightening of monetary policy,’’ he told reporters in Minneapolis after speaking to the Economic Club of Minnesota.
Still, Williams cautioned that he still sees the so-called neutral interest rate remaining lower in the longer run, limiting how high the Fed will be able to raise rates over the course of its tightening cycle before restraining growth. Williams, a voter this year on the policy-setting Federal Open Market Committee, is among the foremost researchers focused on the longer-run outlook for rates.
“With a new normal for short-term rates of around 2 1/2 percent, interest rates are likely to remain low relative to historical experience,” he said in the speech.
Williams sees the neutral rate -- the real rate expected to prevail when the economy is at full strength -- around 0.5 percent today, or around 2.5 percent when accounting for inflation around the Fed’s 2 percent goal. That’s low by historical standards: a “normal interest rate” was roughly 2 percentage points higher 20 years ago.
Some economists have recently suggested that the neutral rate could rise, but he isn’t sold.
“I don’t yet see convincing evidence of such a shift,” Williams said. He’s equally cautious when it comes to productivity, which has also slowed and is one of the drivers behind lower rates. “While I can hope we’re on the brink of another game-changing invention like the internet, for the moment, the data indicate productivity growth is still stuck in low gear.”
Williams said economists can expect recent U.S. fiscal stimulus to increase the neutral rate, which he calls r-star, by no more than 0.25 percentage point over the next decade.
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