Fed's Williams Sees Gradual Hikes as U.S. Economy on Track

How Out-of-Sync Is Fed With Other Central Banks?
  • San Francisco Fed leader says his outlook hasn't changed
  • Pickup in inflation data has been `very encouraging,' he says

Federal Reserve Bank of San Francisco President John Williams said the U.S. economy appears to be weathering cooler global growth and he repeated that the central bank will raise interest rates at a gradual pace.

“Despite recent financial market volatility, my overall outlook for both the U.S. and the global economy remains largely unchanged over the past few months,” Williams said Tuesday in a speech in Singapore. “We took the first small step with a modest rate hike in December, and the future pace will be, as we’ve said repeatedly, gradual and thoughtful.”

Fed officials are discussing how quickly they should raise rates a second time following their first hike for nearly a decade in December. Williams, who doesn’t vote on monetary policy this year, didn’t comment on the timing in his text, though he was among Fed officials who last week said increases could be considered as soon as April.

“I see continued growth in the U.S., and I don’t see the global situation as dire,” Williams said. “The ability of governments and central banks to respond to their own needs while navigating global conditions may not be a miracle cure, but it offers stability.”

Steady Growth

Williams said he expects the U.S. economy to expand at “a bit above 2 percent this year,” pushing the unemployment rate down to around 4.5 percent by the end of 2016.

“On the inflation side, we’re not quite where I’d like us to be, but recent developments have been very encouraging and add to my confidence that we’re on course to reach our goal” of 2 percent, he said.

The threat of a “pretty big correction” in the bond market argues for gradual moves from the Fed, Williams said.

“Bond yields are very low because of policy actions taken around the world,” Williams told reporters after the speech, adding that economists project 10-year Treasury yields will rise to 4.25 percent to 4.5 percent over the next few years. “What happens if some day some event causes markets to reassess -- 10-year Treasuries are too low -- and move back to something of a more normal level. That could be disruptive. I do think that there’s going to be over the next few years a movement of long-term yields back up to more normal levels.”

Negative Rates

Williams said in response to audience questions after his speech that he doesn’t expect negative U.S. interest rates in the “foreseeable future,” while also adding that the Fed has studied such a policy “carefully.”

Asked about the quarterly summary of economic projections, in which Fed officials release their forecasts for the path of interest rates over coming years, Williams said he favors keeping the dot-plot forecasts because they show how policy is likely to evolve with the economy. “I love the dots,” Williams said. “What’s wrong with the dots?”

Williams was head of research for Fed Chair Janet Yellen when she ran the San Francisco Fed. Yellen will give her take on the U.S. economic outlook later on Tuesday with a speech in New York.

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