Fed’s Williams Says Rate Call Was Close, Expects 2015 Liftoff

John Williams
John Williams, president and chief executive officer of the Federal Reserve Bank of San Francisco. Photographer: David Paul Morris/Bloomberg

Federal Reserve Bank of San Francisco President John Williams said the central bank’s decision this week to keep its main interest rate near zero was a close one, and reiterated that he expects an increase in 2015.

“I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year,” said Williams, in remarks prepared for a speech in Armonk, New York, on Saturday at a symposium on China and the U.S. “Of course, that view is not immutable and will respond to economic developments over time.”

Williams, a voting member on the policy-setting Federal Open Market Committee in 2015, highlighted concerns about stubbornly low inflation and growing risks from abroad as among the factors suggesting a patient approach to raising rates, despite U.S. economic progress.

The Fed hasn’t raised interest rates since 2006, and more than half of economists in a Bloomberg survey had expected an increase this month.

“It was a close call in my mind, in part reflecting the conflicting signals we’re getting,” Williams said. “The U.S. economy continues to strengthen while global developments pose downside risks to fully achieving our goals.”

The Fed’s two major objectives are to achieve maximum employment and stable inflation, which it targets at 2 percent.

The unemployment rate dipped to 5.1 percent in August, and Williams said he expects the U.S. to reach full employment by the end of this year or 2016. By contrast, inflation remains subdued, with the Fed’s preferred indicator at just 0.3 percent. An alternate indicator that Williams watches closely, the trimmed mean, is also below target.

Transitory Effects

“Inflation is still lower than I’d like,” Williams said, attributing the weakness to a rising dollar and falling oil prices over the past year. “These effects should prove transitory. As they dissipate, I see inflation moving back up to our 2 percent inflation goal in the next two years.”

Still, economic conditions and policy “from China to Europe to Brazil” have boosted the dollar and held back growth and inflation, and continued problems abroad could exacerbate the effect, Williams said.

Williams’ speech in part echoed the FOMC’s statement from Thursday, which said “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

Recent losses in China’s equity markets may reflect deeper worries over growth prospects for the world’s second-biggest economy, economists say, and slowing demand from China has also helped trigger a global slump in commodity costs.

Williams said today that he doesn’t see the situation in China as “dire,” characterizing it as a rebalancing as Chinese growth moderates to a more sustainable level.

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