Williams Says Fed Rate Hikes Helping Curb Financial Risk-Taking

(Bloomberg) -- U.S. interest-rate increases will help reduce risk-taking in financial markets, Federal Reserve Bank of New York President John Williams said.

"The primary driver of us raising interest rates is just the fact that the U.S. economy is doing so well in terms of our goals,” Williams said Wednesday in a reply to questions after a speech in Bali, where the annual meetings of the International Monetary Fund and World Bank are taking place. “But I would also add that the normalization of monetary policy in terms of interest rates does have an added benefit in terms of financial risks.”

"A very-low interest-rate environment for a long time does, at least in some dimension, probably add to financial risks, or risk-taking, reach for yield, things like that," he said. "Normalization of the monetary policy, I think, has the added benefit of reducing somewhat, on the margin, some of the risk of imbalances in financial markets."

The Fed’s interest-rate setting committee voted on Sept. 26 to raise borrowing costs for an eighth time in three years and projected gradual hikes through 2020. Williams has a permanent vote on the committee due to his position as its vice chairman, whereas other regional Fed bank chiefs rotate each year.

Jobless Rate

During his talk, Williams reiterated that "further gradual increases in interest rates will best foster a sustained economic expansion and achievement of our dual mandate goals" of maximum employment and stable prices.

Fed officials are raising rates because the U.S. jobless rate, at 3.7 percent, is below their estimates of the so-called natural rate of unemployment that they believe would keep the inflation rate stable at the 2 percent target. Those estimates range between 4 percent and 4.6 percent, according to the projections published Sept. 26.

Williams Says Fed Rate Hikes Helping Curb Financial Risk-Taking

U.S. President Donald Trump on Tuesday dismissed concerns about inflation and said the Fed is moving too fast on rate hikes. He said the economy is enjoying “record-setting” numbers and doesn’t want to see it slow down, “especially when we don’t have the problem of inflation.”

Williams, who has long been a staunch proponent of the inflation-targeting framework that focuses on influencing the unemployment rate to keep price pressures in check, said the job has become harder for central bankers because inflation doesn’t seem as sensitive to labor-market conditions now compared with the past.

Trade War

"What that has led me and many of my colleagues to do in the Fed is to look to the labor-market experts, the economists who study labor markets, who tend to focus on things like the flows of people between employment, unemployment, out of the labor force -- looking at the micro-data instead of looking at the aggregate data," Williams said while answering questions from the audience.

"Some of this flow data from the labor market suggests that this economy can actually sustain a lower unemployment rate than a typical estimate, so that I think is really important information, and we’re going to find out over the next couple of years."

The New York Fed chief brushed off the effects of an ongoing trade war between the U.S. and China, telling reporters after the event that the tariffs that the two countries have imposed on each other’s exports have led to uncertainty in the business community while pointing out that so far the effects haven’t shown up in government statistics on hiring and investment.

To contact Bloomberg News staff for this story: Matthew Boesler in Beijing at mboesler1@bloomberg.net;Sarah McGregor in Washington at smcgregor5@bloomberg.net

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