Fed's Williams Sees ‘Strong Case’ for Dec. Increase If Data Hold Up

  • Recent labor market data have been positive, Williams said
  • Doesn't want to signal `mechanical' pace of future Fed action

There’s a “strong case” for a Federal Reserve interest rate increase in December assuming U.S. economic data continues to be encouraging, San Francisco Fed President John Williams said, adding that the slope of increases after an initial move is “most important.”

The U.S. central bank’s policy-setting Federal Open Market Committee will convene in Washington on Dec. 15-16 to discuss a possible policy move. Most economists in a Bloomberg survey and traders of federal funds futures expect lift-off from near-zero, where the bank’s key lending rate has been since 2008, at that meeting.

“Assuming that we continue to get good data on the economy, continue to get signs that we’re moving closer to achieving our goals” and are gaining confidence that inflation will move back toward the Fed’s 2 percent target, there’s “a strong case that can be made in December to raise rates,” Williams said, speaking with reporters at the University of California at Berkeley on Saturday.

Williams’ comments come at a time when the Fed is trying to assess whether it has drawn close enough to accomplishing its dual mandate of maximum employment and price stability to raise interest rates.

Labor ‘Hiccup’ Reversed

“What I have said, and I still hold to this, is it was a close call,” Williams said of the bank’s decision to hold rates steady at its October meeting. Since then, “the data, I think, have been overall encouraging, especially on the labor market. The data show that the hiccup we saw in a couple of labor reports has reversed,” he said.

The U.S. in October added 271,000 jobs, the most so far this year, and the unemployment rate fell to 5 percent, the lowest since 2008, Labor Department data showed.

Williams said that the pace of increases is the “most important thing” to communicate, and that “we definitely do not want to, either through our actions or our words, indicate a preference or a very mechanical path of interest rates.”

Policy makers, including Fed Chair Janet Yellen, have said that rate increases will be gradual and data-dependent.

‘We’re Data-Dependent’

“Since the economic data can surprise on the upside and the downside, maybe there will be some opportunities for us to show that we’re data-dependent by moving a little slower or a little more quickly,” Williams said. “I do worry because of the episode of the mid-2000s of locking ourselves in, just because we did something two or three times in a certain way.”

In the 2004-2006 cycle, the Fed, under Alan Greenspan and later Ben Bernanke, raised rates 17 times in quarter-point increments and at the time announced it expected to remove accommodation “at a pace that is likely to be measured.”

Williams also said data have been consistent with “core measures of inflation having stabilized and maybe even starting to firm up some.” That assessment is important because policy makers have been eagerly watching for signs of life in price pressures: the Fed’s preferred inflation gauge has undershot their 2 percent target since 2012.

Williams has been an FOMC voting member in 2015. The San Francisco Fed will next be on the voting rotation in 2018.

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