The time has come for the Federal Open Market Committee to resume raising rates, Federal Reserve Bank of San Francisco President John Williams said Thursday.
"In the context of a strong domestic economy with good momentum, it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later," Williams told the Anchorage Economic Development Corporation, according to prepared text released by the Fed.
Since monetary policy works with a lag, the FOMC must be forward-looking, he said. "If we wait until we see the whites of inflation's eyes, we don't just risk having to slam on the monetary policy brakes, we risk having to throw the economy into reverse to undo the damage of overshooting the mark. And that creates its own risks of a hard landing or even a recession," he said.
Further, he warned, if the economy is overheated too long, it "can generate imbalances, ultimately leading to either excessive inflation or an economic correction and recession."
Also, raising rates now "would allow a smoother, more gradual process of normalization," Williams said. "This gives us space to fine-tune our responses to any surprise changes in economic conditions. If we wait too long, the need to play catch-up wouldn't leave much room for maneuver. Not to mention, it could roil financial markets and slow the economy in unintended ways."
Williams, who is not an FOMC voter this year, said the nation is at full employment and closing in on 2% inflation. While the unemployment rate is just one indicator of labor market health, Williams said, "the multiple indicators tend to move together and are sending similar signals, with almost universal improvements across them all."
Labor force participation, which has been of concern to some observers, is "back pretty close to what I see as normal," Williams said.
Acknowledging inflation has "been persistently below target over the past several years," he said, "influences" that have held back inflation, including a stronger dollar and declining energy prices, will "fade." Underlying inflation, he said "is in the 1½ to 1¾ percent range. We're not quite at our target, but the strength of the labor market should help us along."
Williams said his forecast had not changed drastically since rates were first raised in December, as he continues seeing signs of expansion. "Consumer spending is strong, the labor market is running apace, and household balance sheets are improving. All in all, I see a strong domestic economy."
It might take "somewhere around 80,000 new jobs a month to keep up with the growing labor force," as a result of changing demographics, he said. "Some may call this disappointing, and it was when we were climbing out of the hole the recession left. But this is the new normal, as is trend growth of a little over 1½ percent going forward. If we want to bend the curve, it's not going to be through monetary policy. It's going to be through legislative policies that have a chance at fundamentally changing the direction of growth—like longer-term investments in human and physical capital like education and infrastructure."
