The federal funds rate target should continue rising gradually until reaching its “new normal of 2.5%,” Federal Reserve Bank of San Francisco President John Williams said Wednesday.
“To be specific, based on my outlook for employment and inflation, I view a gradual pace of increases over the next two years, bringing the federal funds rate to its new normal of 2.5 percent, to be appropriate,” Williams told Salt Lake Area community leaders, according to prepared text of a speech released by the Fed.
The Fed’s balance sheet will decrease to the level needed in about four years, he predicted, and this will gradually increase long-term rates.
“I want to emphasize that we will continue to use conventional monetary policy tools to bring interest rates to their ‘new normal’ levels,” Williams said. “The process of shrinking the balance sheet will happen in the background, in a gradual and predictable manner.”