Fed's Williams reiterates call for rate increase "sooner than later"
President of the San Francisco Federal Reserve Bank John Williams reiterated his call for an increase in the Fed's interest rates "preferably sooner rather than later" and for a debate on the convenience of deploying a nominal GDP target.
In prepared remarks for a speech in Nevada, Williams said: "we're not quite at our [inflation] target yet, but the combination of fading transitory factors and a strong economy should help us get back to our 2% goal in the next year or two," Williams said.
"All in all, I see a solid domestic economy with good momentum going forward."
He expected the unemployment rate to drop to 4.5% over the next year given how year-to-date in 2016 the rate of job growth was running at over twice that of the labour force.
"In the context of a strong economy with good momentum, it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later," Williams added.
The San Francisco president had remarked last month about the necessity of a near-term rate increase, but a mixed jobs report and recent weak survey readings for the manufacturing and services sectors since then had led some investors to downgrade their expectations for an interest rate increase, at least at the Fed´s policy meeting on 20-21 September.
Williams was not a voting member on the rate-settling Federal Open Market Committee, but he was the top adviser to Fed chief Janet Yellen when she was the head of the San Francisco Fed, Market News International pointed out.
"History teaches us that an economy that runs too hot for too long can generate imbalances, potentially leading to excessive inflation, asset market bubbles, and ultimately economic correction and recession."
"A gradual process of raising rates reduces the risks of such an outcome. It also allows a smoother, more calibrated process of normalization that gives us space to adjust our responses to any surprise changes in economic conditions," he said.
He also warned in his speech that the "new normal" of low interest rates may make the central bank´s job harder.
"There simply may not be enough room for central banks to cut interest rates in response to an economic downturn when both natural rates and inflation are very low."
Hence, targetting the nominal rate of growth in gross domestic product (which entails possibly raising the Fed´s inflation target) "may be better suited to periods when the lower bound constrains interest rates because they automatically deliver the 'lower for longer' policy prescription the situation calls for," he said.