Williams Says Three, Maybe More 2017 Fed Hikes Make Sense

Updated on
  • San Francisco Fed chief, a non-voter, says it’s data-dependent
  • May be closer to start shrinking balance sheet by end of year

Pimco's Bosomworth Says Fed Delivers Three Hikes in 2017

Federal Reserve Bank of San Francisco President John Williams said that three or “maybe even more” interest-rate increases this year make sense, depending on how the central bank is doing on its employment and inflation objectives.

“A view, like the median view of my colleagues, of say three or maybe even more increases this year, makes sense to me, but it would depend on the data,” Williams said in a Wall Street Journal video interview broadcast on its website on Thursday.

The Federal Open Market Committee voted to lift rates for the first time in 2017 on March 15 and signaled that more hikes are coming. The median estimate was for three rate increases in total this year, based on quarterly forecasts submitted by policy makers. That outlook comes at a time when inflation is edging up toward the Fed’s 2 percent objective and unemployment has fallen to levels broadly consistent with an economy at or near full employment.

“The momentum in the economy has been very positive,” Williams said. “In terms of the U.S. outlook, risks are pretty balanced overall, which is a good place to be.”

Minneapolis Fed President Neel Kashkari, a monetary policy voter this year who emerged as the Fed’s most dovish voice when he dissented against the March rate increase, said Thursday that “we know we’re coming up short on our inflation mandate” and there is still slack in the labor market.

See what “full employment” really means.

“We have very powerful tools if inflation rises to the upside,” Kashkari told reporters after delivering a speech in Washington, reiterating a point he made in a post last week explaining his decision to dissent. Kashkari favors holding off on more rate increases until the Fed has set out a detailed plan for dealing with its balance sheet.  

‘Not Quite There’

The central bank has said it will start shrinking its holdings, which stand at about $4.5 trillion after three rounds of bond buying, once interest-rate normalization is “well underway.” Williams on Thursday said that standard hasn’t yet been met.

“We’re not quite there,” he said. “But I would expect -- assuming the economy progresses as I expect and we raise interest rates a few more times this year -- that we’ll be closer towards the end of this year to be ready to start that process of the normalization of the balance sheet.”

Williams added that the process will be gradual, predictable and that it will take a number of years to get the balance sheet back to “normal.” He gave no indication of what “normal” means. The ultimate size of the Fed’s balance sheet is an open question among investors, and hasn’t been publicly settled by the policy-setting committee.

Williams doesn’t vote on monetary policy this year, but is seen by economists as a relatively good signal of future policy. He was the director of research at the San Francisco Fed when now-Fed Chair Janet Yellen was president of the bank.

(Updates with Kashkari comments starting in the fifth paragraph.)
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