Williams: Sustaining Recovery Should Be Goal

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With the dual mandate in sight, the Federal Reserve needs to determine how to sustain the recovery, Federal Reserve Bank of San Francisco President and CEO John C. Williams said Wednesday.

"With an economy at full employment, inflation nearing the Fed's 2% goal, and the expansion now in its eighth year, the data have spoken and the message is clear: We've largely attained the hard-sought recovery we've been after for the past nine years," Williams told the Forecasters Club in New York, according to prepared text released by the Fed. "In light of this achievement, we need to shift the conversation from 'how do we achieve a sustained recovery?' to 'how do we sustain the recovery we've achieved?'"

Monetary policy must be geared toward a "Goldilocks economy" – one that "doesn't run too hot or too cold," he said.

Monetary policy remains accommodative, near historical lows. But, Williams warned that normalization is needed to keep the economy from overheating.

It is an attempt to cool the economy that led to the rate hike in March and plans for two more hike this year.

"My own view is similar to most of my [Federal Open Market Committee] colleagues," he said. "I should note, however, that given my forecast, along with upside risks, I would not rule out more than three increases total for this year."

Williams said he believes that despite normalization, "the economy will grow at a healthy pace."

Supply-side factors remain the biggest impediment to growth, but correcting that is outside the capabilities of monetary policy, he said.

The 2% inflation target should be attained "in the next year or so," he said.

Unemployment will drop to 4.5% by yearend, Williams predicted, an overshoot of full employment. "This, in turn, implies that some slowing of growth slightly below potential will be needed in the future."

But while the labor market gains have been impressive, he said, "One of the fascinating things that's been going on in the economy is that GDP growth has been almost equally unimpressive." He projects 1.75% real GDP growth this year and next.  

Part of the problem, Williams said, is in the 1990s technology strove "to make businesses more efficient and productive. Today, many new innovations are aimed at our leisure time."

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