- Williams says China's growth outlook is a major wild card
- Weakness abroad and strength of dollar are keeping rates low
Federal Reserve Bank of San Francisco President John Williams said international risks pose the greatest threat to the U.S. economic expansion, and China in particular is a concern.
“If you were to ask me what keeps me up at night, or what are the shocks that could cause a recession, I would say almost all of them are outside the U.S. borders,” Williams said Friday on a panel discussion in San Francisco. “I’m actually feeling a little bit more positive around Europe,” he said, but “China’s the wild card.”
The Fed is assessing when the economy will be strong enough to withstand another interest-rate increase after the central bank made its first hike since 2006 last month. Policy makers have said that the path forward will be gradual and data-dependent, and are keeping an eye on economic indicators, markets and the outlook overseas.
Their discussion comes against a backdrop of modest expansion in Europe and uncertainty in China. Growth in the world’s second-largest economy is expected to slow to 6.3 percent this year from 6.8 percent in 2015 and 7.3 percent in 2014, based on the International Monetary Fund’s World Economic Outlook from October. “It’s very hard” to know what’s happening in China, Williams said, though what he’s worried about is a sharp decline in growth rather than a gradual slowdown.
“We are very connected to the rest of the world,” Williams said. “The reason the Fed is keeping interest rates still so low, the reason the economy, in my mind, is still growing only 2 percent even with very low interest rates, even though a lot of things are getting better, most of it is because of weakness abroad and the strength of the dollar.”
Williams, who does not vote on policy this year, reiterated that the big question for the Fed domestically is how inflation will shape up. Price pressures have remained below the Fed’s 2 percent target since 2012, and their preferred index stood at only 0.4 percent in November, weighed down by cheap oil and a strong dollar.
The Fed retains the option to pause its hiking cycle to reassess economic conditions as it moves forward, Williams told reporters. During the panel, he said that he will “stick with the view that right now it’s going to take a gradual three-year process to get interest rates back to normal.”
“Things look like they’re doing well, but that was in the context of basically the Fed having the pedal to the metal,” Williams said. "We still need to give the economy a bit of a nudge,” to keep growth within the range of 2 percent to 2.25 percent he thinks is appropriate, he said.
Market participants do not expect a rate increase at the Federal Open Market Committee meeting this month, based on federal funds futures pricing assuming that the rate will settle between 0.5 percent and 0.75 percent after the increase. Almost 30 percent expect an increase in March.
Williams told reporters that he is aware that expectations for a January increase are low, but declined to comment on the prospect for a move this month.