Fed’s Williams Sees Need for Rate Hikes While Harker Eyes December

  • Says bank loan spreads may be hit in low rate ‘new normal’
  • Fed’s Harker backs rate hike in December, three moves in 2018

Federal Reserve Bank of San Francisco President John Williams said moderate growth and his outlook for higher inflation will allow the U.S. central bank to raise interest rates, while his counterpart in Philadelphia signaled he’s anticipating a hike in December.

“Favorable employment numbers, combined with the findings on inflation and the steady pace of growth, are all behind my confidence that rates will need to rise to their new normal levels,” he said Thursday at a community bank research conference in St. Louis, without giving any hints on the timing of the next move.

Philadelphia Fed President Patrick Harker separately told CNBC television earlier on Thursday that he’s “penciled in” a move in December and three hikes next year. He’s a voting member this year of the Federal Open Market Committee, which is scheduled to meet next on Oct. 31-Nov. 1.

The Fed left rates unchanged when it met last month while continuing to forecast another rate increase this year and three in 2018. The central bank also announced it would start a gradual unwinding of its $4.5 trillion balance sheet this month.

Fed officials have been weighing a recent spate of disappointingly low inflation data below their target for 2 percent, which they’ve missed for most of the past five years.

Weak Inflation

The San Francisco Fed chief blamed slow inflation, which slipped to 1.3 percent excluding energy and food prices in the 12 months to August, on swings in categories that are less tied to cyclical strength or weakness in the economy.

“Sharp price movements in these industries have proven to have a temporary effect on inflation, and I don’t expect them to last this time either,” Williams said. He said he expects prices to pick back up toward 2 percent as those effects fade.

Williams said he expects the unemployment rate to decline over the next year, ultimately falling a bit below 4 percent.

Central bankers are grappling with several economic puzzles -- from too-low inflation to tepid productivity -- but there’s consensus that interest rates won’t climb back to previously normal levels amid slow labor force and slower productivity growth.

Williams, who does not vote on monetary policy this year, has been at the fore of researching the topic, and reiterated his warning that it comes with major implications for the future of monetary policy.

“Conventional monetary policy has less room to stimulate the economy during an economic downturn,” he said. “We will need to lean more heavily on unconventional tools, like central bank balance sheets, keeping interest rates very low for a long time, and potentially even negative policy rates.”

He argued the neutral rate, that which neither spurs nor reins in growth, is around 0.5 percent today, meaning that with 2 percent inflation, 2.5 percent would be an equilibrium rate setting.

“For bankers, a new normal of moderate growth and lower interest rates will have a significant bearing on lending growth and profitability.”

    Before it's here, it's on the Bloomberg Terminal.