Federal Reserve Bank of San Francisco President John Williams said he expects the Fed to continue raising interest rates gradually, and that this could include another increase by the end of this year.
In a briefing with reporters in Zurich, where Mr. Williams was attending a conference held by the Swiss central bank, he said inflation in the U.S. should rise toward the Fed’s 2% target over the next two years. U.S. inflation has undershot the Fed’s target with its preferred annual gauge excluding volatile food and energy categories at 1.4% in July.
“My own view is that it has been not that baffling,” Mr. Williams said, referring to low inflation. He noted that prices in some sectors such as health care and cellular services have been hit by downward movements, and that prices typically reflecting developments in the economy have been rising.
“With a strong economy, history teaches us that inflation tends to move up,” he said.
Assuming the U.S. remains on a path of rising inflation and modest economic growth — Mr. Williams expects 2.5% gross domestic product growth this year and slightly less than 2% in 2018 — the Fed should be able to raise interest rates gradually toward what he sees as the “normal” longer-term policy rate of about 2.5%.
That could include another rate increase this year and around three in 2018, he said, which is in line with projections released Wednesday by the Fed.
The comments from Mr. Williams came two days after the Fed kept its key policy rate unchanged at a range between 1% and 1.25% and said it would begin shrinking its portfolio of bonds next month.
Beginning in October, the Fed will start to slowly reduce its balance sheet and allow $10 billion in holdings to roll off without reinvestment every month. Those amounts will increase by $10 billion each quarter to a maximum of $50 billion.
Mr. Williams said he agreed with this gradual reduction in the Fed’s $4.5 trillion balance sheet, and said the Fed was mindful of its experience in 2013 when it signaled a winding down of its bond-purchase program that caused global investors to start pricing in the possibility of actual rate increases. Global markets plunged, and the episode became known as the “Taper Tantrum.”
“If you asked me a year ago what your concerns were about balance sheet normalization…the answer is we don’t want to relive the taper tantrum. That’s the context of thinking about this,” Mr. Williams said.
Source: Dow Jones