The Federal Open Market Committee can begin normalization of monetary policy at any meeting, but it will depend on economic data, Federal Reserve Bank of San Francisco President and CEO John C. Williams repeated Tuesday.
The data "may push us a little in one direction or the other, and there will be a lot of discussion and debate," he told the New York Association for Business Economics, according to prepared text released by the fed. "Every FOMC meeting is on the table. That's what it means to be data dependent."
Being able to "entertain such a move is a tremendously positive sign," Williams said, noting it shows "how much the economy's improved, that unemployment has come way down, and that we may be able to start cutting back on accommodation because of that strength."
Williams acknowledged there are dissenters, who prefer to wait until 2016 for liftoff, afraid "a premature rate hike would allow inflation to fall further and possibly derail the recovery. They're wondering what the rush is."
In response, Williams noted, a rate hike would not be setting "tight policy, merely easing back on exceptionally accommodative policy. We've had over six years of this stance, and accommodation will continue to characterize monetary policy for some time. Rate rises will likely be gradual, and the Fed's $4 trillion-plus balance sheet will continue to provide substantial stimulus. We're not pulling the rug out from underneath the economy."
Also, he noted, monetary policy works with a lag of a year or two, and using an analogy of a driver approaching an intersection, so it's time to ease off the gas so there will be no need to "slam on the brakes or even skid through the intersection" when inflation reaches its 2% target.
"Overshooting the mark would force us into a much more dramatic rate hike to reverse course, which could have a destabilizing effect on the markets and possibly damage the economic recovery," Williams said. "The decision to raise rates is actually three decisions: Not just when, but how quickly and how high. I see a safer course in a gradual increase, and that calls for starting a bit earlier."
As for the slowness seen in the first quarter, Williams noted, "We need to look at data over the longer term. We can't get distracted by blips and temporary downs — or ups for that matter."
Overall, he said, the data "convince me that we're still on solid footing." Despite recent slowness, "for the past four years, first-quarter real GDP growth has averaged more than 2 percentage points lower than during the rest of the year. While there is no single culprit, weather has definitely been a villain." And, he said, he foresees 2015 following that pattern.
Williams stressed, "it's important that we don't jump to conclusions — or policy decisions — based on noisy data. As more information comes in, we'll have a better picture of where the economy is headed. We'll have two additional months of data going into the next FOMC meeting, which should paint a more complete picture than we have now. Either way, there's no pressure to decide on the future path of policy today, so I am in 'wait and see mode,' with a keen eye on the data."
