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Fed's Williams sees interest rates rising as inflation moves up

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Federal Reserve policy maker John Williams made the case on Monday for further gradual increases in interest rates, saying he expects inflation to rise to the central bank's 2 per cent target next year as unemployment edges lower.

[WASHINGTON] Federal Reserve policy maker John Williams made the case on Monday for further gradual increases in interest rates, saying he expects inflation to rise to the central bank's 2 per cent target next year as unemployment edges lower.

"Gradually raising interest rates to bring monetary policy back to normal helps us keep the economy growing at a rate that can be sustained for a longer time," Mr Williams said in remarks prepared for delivery at the University of Technology Sydney.

The comments by the president of the Federal Reserve Bank of San Francisco suggest that he's lining up with Fed Chair Janet Yellen, his predecessor at the bank, in an emerging debate on how to respond to an easing in inflation during the last few months.

While some Fed officials have argued for a pause in the rate-hiking campaign to wait for clearer signs that inflation is indeed headed higher, Ms Yellen has played down the significance of recent weak price data and suggested that the Fed remains on course for higher rates.

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Mr Williams seemed to agree.

"Some special transitory factors have been pulling inflation down," he said.

"But with some of these factors now waning, and with the economy doing well, I expect we'll reach our 2 per cent goal some time next year."

Special Factors

Those special factors include a steep drop in the cost of mobile-phone services. That helped pull down the Fed's favorite inflation gauge to 1.7 per cent in April from 1.9 per cent in March and 2.1 per cent in February.

Mr Williams also saw a danger in the Fed allowing the unemployment rate to fall too far.

"The very strong labour market actually carries with it the risk of the economy exceeding its safe speed limit and overheating, which could eventually undermine the sustainability of the expansion," he said.

At 4.3 per cent in May, the US jobless rate was already below what Mr Williams thinks is its long-run sustainable rate of 4.75 per cent. And he sees it dropping some more.

"Given the strong job growth we've been seeing in the United States, I expect the unemployment rate to edge down a bit further and remain a little above 4 per cent through next year," Mr Williams said.

Rate Increases

The Fed earlier this month raised interest rates for the second time this year. Policy makers have penciled in one more rate increase for 2017 and three more for 2018, according to projections released after their June 13-14 meeting. Mr Williams is not a voting member of the Federal Open Market Committee this year but will vote in 2018.

Mr Williams affirmed the Fed's intention to begin trimming its US$4.5 trillion balance sheet this year, saying the central bank would start off "nice and easy". The aim will be to gradually reduce bond holdings in a widely telegraphed and predictable fashion, he said.

"I hope I'll not be perpetuating an unfair stereotype about economists if I say that 'boring' is a virtue," Mr Williams said.

"Indeed, my new mantra is, 'Boring is the new exciting.'"

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