Fed's Williams Sticks by 2015 Rate Call, Sees Imbalances Forming

  • Economy is looking up, according to 2015 policy voter
  • Asset prices in real estate moving up `trips the alert system'

San Francisco Federal Reserve President John Williams repeated that he expects the U.S. central bank to raise interest rates this year and sounded a warning over rapidly rising house prices, though he said they had not yet reached a “tipping point.”

“I am starting to see signs of imbalances emerge in the form of high asset prices, especially in real estate, and that trips the alert system,” Williams said in prepared remarks Monday in Los Angeles. “One lesson I have taken from past episodes is that, once the imbalances have grown large, the options to deal with them are limited.”

Williams, who votes on monetary policy this year, said he expected unemployment to fall under 5 percent this year and that inflation will move back up toward policy makers’ 2 percent goal.

“All in all, things are looking up, and if they stay on track, I see this as the year we start the process of monetary policy normalization,” Williams said, noting that there are risks to his outlook, particularly dollar appreciation and spillovers from slowing growth abroad.

Overseas Headwinds

Williams was the second voting Fed official to on Monday signal a rate increase this year, after New York Fed President William C. Dudley spoke in New York earlier. Williams and his colleagues are trying to gauge whether economic conditions warrant a rate hike at a time when encouraging domestic developments contrast with a dimmer outlook abroad. 

U.S. unemployment has fallen to 5.1 percent. Growth has expanded above a 2 percent pace, and consumers continue to spend. On the other hand, Chinese growth is slowing, cooling the outlook for other developing economies and sapping commodity prices, adding to downward pressure on U.S. inflation.

“To understand why inflation has remained low despite an economy nearing full employment, we have to look beyond our shores,” Williams said. “Based on past experience, these effects should prove transitory.”

Even as prices have continued to disappoint, Williams noted that monetary policy works with lags and “if you’re headed towards a red light, you take your foot off the gas so you can get ready to stop.”

“An earlier start to raising rates would allow us to engineer a smoother, more gradual process of policy normalization,” Williams said. “In contrast, raising rates too late would force us into the position of a steeper and more abrupt path of rate hikes, which doesn’t leave much room for maneuver.”

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