With the economy expanding, a tight labor market, and inflation moving toward 2%, gradual rate increases are in order, and the sooner the better, Federal Reserve Bank of San Francisco President and CEO John C. Williams said Friday.
"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 told the Federal Home Loan Bank of San Francisco's 2016 member conference, according to prepared text released by the Fed. "Let me be clear: In arguing for a gradual increase in interest rates, I'm not trying to stall the economic expansion. It's just the opposite: My aim is to keep it on a sound footing so that it can be sustained for a long time."
An overheated economy, in the long run, can cause too high inflation and bubbles that could result in "economic correction and recession." By raising rates gradually, the risk of a poor outcome is lowered, he said.
Another benefit of gradual increases is "a smoother, more calibrated process of normalization that gives us space to adjust our responses to any surprise changes in economic conditions. If we wait too long to remove monetary accommodation, we hazard allowing imbalances to grow, requiring us to play catch-up, and not leaving much room to maneuver. Not to mention, a sudden reversal of policy could be disruptive and slow the economy in unintended ways," Williams said.