With employment near its “natural rate” and inflation expected to “gradually” approach the Fed’s 2% target, interest rates should be raised before the end of the year, unless economic developments suggest otherwise, according to Federal Reserve Bank of San Francisco President and CEO John C. Williams.
“Looking forward, I expect that we’ll reach our maximum employment mandate in the near future and inflation will gradually move back to our 2 percent goal,” Williams said in a speech in Utah, according to prepared text released by the Fed. “In that context, it will make sense to gradually move away from the extraordinary stimulus that got us here. We already took a step in that direction when we ended QE3. And 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. Of course, that view is not immutable and will respond to economic developments over time.”
The speech was similar to the one Williams presented in Los Angeles earlier this week.
Williams said he believes 5.0% is the “natural rate of unemployment” and with the unemployment rate at 5.1%, he expects that target to be met before yearend.
Inflation is somewhat trickier, with Williams using the trimmed mean, which puts the underlying inflation “stable at just over 1½ percent.”
Inflation has remained low despite the employment upturn, Williams said, as a result of the strengthening dollar, lower oil prices and a drop in import prices, all of which “should prove transitory. As they dissipate, and as the economy strengthens further over the next year, I see inflation moving back up to our 2 percent goal in the next two years.”
Williams foresees the pace of new jobs slowing, with the economy needing to add 100,000 jobs a month, and suggests GDP growth of 2% would be appropriate. “If jobs and growth kept the same pace as last year, we would seriously overshoot our mark. I want to see continued improvement, but it’s not surprising, and it’s actually desirable, that the pace is slowing,” he said.
While risks remain, “all in all, things are looking up, and if they stay on track, I see this as the year we start the process of monetary policy normalization.”
