Fed's Williams says economy is in good shape and hike warranted

[WASHINGTON] Federal Reserve Bank of San Francisco President John Williams painted an upbeat picture of the US economy in a speech on Tuesday, despite recent disappointing data that have led investors to reduce their bets on an interest-rate increase later this month.

The economy is "in good shape and headed in the right direction," Mr Williams said, according to a text of his remarks in Reno, Nevada. As a result, "it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later," Mr Williams said, repeating an argument that he made Aug 18 in Alaska, though incoming data since then has been mixed.

Hiring slowed last month while US service industries expanded at the weakest pace in six years, joining manufacturers in an abrupt deceleration. That's straining investors' confidence in the US economic outlook and the Fed's willingness to raise rates when officials meet Sept 20-21 in Washington.

Prices in federal funds futures contracts imply around a one-in-four chance of a quarter percentage-point hike later this month, down from nearly one-in-three on Friday.

Mr Williams pointed to the larger picture, in which unemployment has declined to 4.9 per cent from a 10 per cent post-recession peak, while voicing confidence that "inflation is well within sight of and on track to reach our target" of 2 per cent in the next year or two. He's not a voting member this year of the policy-setting Federal Open Market Committee.

He said that if Fed officials wait too long to remove monetary accommodation, they "hazard allowing imbalances to grow, requiring us to play catch-up, and not leaving much room to maneuver."

Mr Williams repeated his view that the neutral rate of interest - the one that neither stokes nor slows growth - has probably fallen.

That will keep rates lower than in the past and give the Fed less room to ease policy in the next downturn, which may "necessitate a greater reliance on unconventional tools like central bank balance sheets, forward guidance, and potentially even negative policy rates."

BLOOMBERG