Fed's Williams sees reason to increase rates soon and slowly

[WASHINGTON] The Federal Reserve is progressing toward its dual mandate of stable prices and maximum employment and should raise interest rates in the near future, said John Williams, president of the Federal Reserve Bank of San Francisco.

"We always have to be looking through the front window" in setting monetary policy since it works on the economy with a lag, Williams said, speaking on Bloomberg Television with Michael McKee on Monday. "My own view is that the economy is still on a good trajectory." Investors, responding to a string of tepid US economic readings, have cut their bets the Fed will raise rates this year. Williams said that he expects inflation to stabilize and growth to stay on track, allowing policy makers to act "in the near future." Officials at their meeting last month kept rates near zero amid growing risks to their outlook, due primarily to slower growth in China. Chair Janet Yellen, Vice Chairman Stanley Fischer and other officials, including Williams, have since said they still expect a rate rise warranted this year, though Fed governors Lael Brainard and Daniel Tarullo have argued for patience. Policy makers meet again Oct 27-28 and in December.

Forecasts prepared for the Sept 16-17 Federal Open Market Committee gathering showed that 13 of 17 officials saw a rate rise warranted this year. Investors are less optimistic. Trading in federal funds futures indicates the probability of a move by the December FOMC is around 32 per cent, based on an effective funds rate after liftoff of 0.375 per cent.

Williams, who votes on policy this year, wouldn't say whether he supports an October rate hike. Speaking in Spokane, Washington on Oct 8, Williams said that "given the progress we've made and continue to make on our goals, I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year," a statement he neither reiterated nor walked back on Monday.

Williams did repeat that the pace of increases should be gradual, leaving policy accommodative for "another few years." With such an approach, the US will run a "high-pressure economy" for a time, he said. While that's good because it will suck workers into the labor market who are currently on the sidelines, "we don't want to do that too long" for fear of imbalances arising.

"It's unlikely that we'll have to raise rates very rapidly, but at the same time, we don't want to have to get behind the curve," Williams said. "We want to get this just right." Some officials have warned against prematurely tightening policy because the central bank doesn't have much room to ease if the economy subsequently falters. Williams said the Fed can "clearly" lower rates again if needed, and use other tools "if necessary." "I have no concerns about our ability to do that, or our willingness to," he said.

BLOOMBERG