Further gradual Federal Reserve interest-rate increases are warranted to keep the U.S. economy on a sustainable course and avoid excess inflation or damaging asset bubbles, said San Francisco Fed President John Williams.
"In the context of a strong economy that has reached our maximum employment goal and with inflation nearing our price stability goal, it makes sense that the FOMC has undertaken a process of raising interest rates," Williams said Tuesday in Sacramento, California, referring to the policy-setting Federal Open Market Committee. "Looking ahead, further gradual increases in the target fed funds rate will likely be appropriate."
Fed officials lifted the benchmark rate to 0.5 to 0.75 percent in December, their second increase in 12 months. Their economic projections pointed to three quarter-point rate hikes in 2017 if the economy stays on the expected trajectory. Williams said he views risks to his outlook as roughly balanced and repeated that he sees a case for raising rates three times in 2017.
"If the economy really accelerates faster, inflation really picks up, obviously we'll have to adjust upward," he told reporters after the speech.
Some of his colleagues have said they see risks tilted to the upside as a new Republican president and Congress usher in fiscal policies that could include regulatory reform, tax cuts and infrastructure spending with potential to spur growth and inflation.
Williams said he favored a debate about allowing the Fed's balance sheet to shrink if the economy is boosted by fiscal stimulus, echoing remarks earlier on Tuesday from Fed Governor Lael Brainard regarding the central bank's $4.5 trillion bond portfolio.
"History teaches us that an economy that runs too hot for too long can generate imbalances, eventually leading to excessive inflation, asset market bubbles, and ultimately economic correction and recession," he said.
