The Federal Reserve is not behind the curve and will not overreact to economic growth, Federal Reserve Bank of San Francisco President John Williams said Friday.
“For the moment, I don’t see signs of an economy going into overdrive or a bubble about to burst, so I have not adjusted my views of appropriate monetary policy,” Williams told a meeting of the Financial Women of San Francisco, according to prepared text released by the Fed. “So my message to those concerned about a knee-jerk reaction from the Fed is that, as always, we’ll keep our focus on the dual mandate and let the data guide our decisions.”
Strong economic growth, low unemployment and inflation “finally headed in the direction Fed economists have been hoping for,” offer reasons for optimism, he said. Although the news is good, “there’s anxiety about how the Federal Reserve is going to react,” he noted.
But concern about the Fed moving too quickly or “too slowly because we fail to spot a financial bubble,” is unfounded, according to Williams.
“[G]iven that the economy’s performing almost exactly as expected, you can expect policymakers to do the same,” he said, noting the Summary of Economic Projections indicates what the Fed plans. “[M]y own view is we should stick to that plan” of gradual rate hikes this year.
Gradual increases will fuel the expansion and keep the economy from overheating, while allowing interest rates to get “closer to more normal levels,” Williams said.
“Policymaking is, by its very nature, a long game,” he noted. “The full effects of a change the FOMC makes today are unlikely to be felt for two years: A knee-jerk reaction would have far-reaching consequences, and my FOMC colleagues and I are well aware of that. My approach is to always follow the data very carefully and then adjust my recommendations accordingly.”
Williams said he is enthused about financial conditions. “The really good news about this expansion is that it’s taking place nationwide and across the full range of sectors,” he said. “Consumer spending, manufacturing activity, and construction are all showing strong numbers. And it’s part of a global trend of stronger-than-expected growth.”
With growth hitting 2.5% last year and expected to be the same this year, Williams said, it’s above trend, which he sees at 1.75%, but “solid.” Tax cuts, strong financial conditions and an improving global economy “have all created tailwinds that can account for the healthy pace of growth. Because of these tailwinds I have boosted my growth forecasts for this year, but I don’t see an economy that’s fundamentally shifted gear.”
And, he noted, expansions do not die of old age. “Recessions generally happen because of unanticipated shocks,” which he said are “notoriously hard to predict, but they happen for a reason, not because the business cycle has a time limit on it. Given that the pace of growth is somewhat above trend, my view is that we need to continue on the path of raising interest rates. This will keep the economy on an even footing and reduce the risk of us getting to a point where things could overheat.”
Williams pronounced his faith in the Phillips curve. Transitory factors, he said, stifled inflation in 2017, especially health care costs, and “are slowly disappearing from the data.” Also, it takes time for “the effects of low unemployment and a strong economy to translate into higher inflation, with a common delay of about 12 months.
“The recent price data have been encouraging in this regard, and I expect that we’ll continue to see inflation pick up this year and the next,” he said. “Fear not, the Phillips curve is alive and will soon be kicking!”