John Williams, president of the Federal Reserve Bank of San Francisco, said Monday that the Fed is seriously weighing a June rate hike.
“We’re going to get a lot more data between now and our June meeting,” Williams told Yahoo Finance. “I do view June as a live meeting, in the sense that we are seriously considering at that meeting whether we should have the next rate hike. But it will depend also on the conversations we have in the meeting room itself.”
Despite a lackluster first quarter GDP report and weaker-than-expected new payrolls in April, Williams believes the US economy is gaining strength.
“I think the economy could withstand a rate hike,” Williams said. “A 25 basis point increase in short term interest rates alone doesn’t have that big of an impact on the economy. In terms of whether we should do that, I think it’s a balancing act.”
With unemployment hovering around 5% and inflation slowly increasing, Williams sees the economy heading in the right direction, noting that the 160,000 jobs added in April are well above the 80,000 jobs per month he believes is needed for employment growth. “We don’t need to see 200,000 jobs a month to think things are good.”
Meanwhile, inflation has run below the Fed’s 2% target for four years, but it has started to strengthen in recent months. The personal consumption expenditures index, the Fed’s preferred measure of price inflation, rose 0.8% in March year-over-year as core inflation increased 1.6%.
If the economy continues on this path, Williams says investors should be prepared for three to four rate hikes next year, with rates eventually normalizing in two years. Williams sees the benchmark rate climbing to 3% to 3.25%, well below the historical average of 5.5%.
However, those increases are predicated on a stable, growing economy–– without the market turmoil that characterized January and February. But don’t blame the Fed for that volatility, said Williams.
“Maybe you’ll call me defensive. I do think that after we did finally raise rates–– after seven years in December–– we didn’t actually see the turmoil then,” said Williams. “There are international developments. Concerns about China and emerging market countries did come up earlier this year. The good news is that since the August turmoil of last year, things have calmed down quite a bit.”
A draft of the full transcript is available below. It has been edited for clarity.
AS Traders are pricing in a June rate hike at 26%, but is that high enough? Joining us now to discuss is San Francisco Fed President John Williams. John welcome. So, just between you and me, is the Fed going to raise rates in June?
WILLIAMS It depends. We are in a data dependent mode, as you heard a million times, and we’re going to get a lot more data between now and our June meeting: a lot of data on the U.S. economy, obviously get a better read also on global developments. I do view June as a live meeting in the sense that we’re seriously considering at that meeting whether we should have the next rate hike. But it will depend also on the conversations we have in the meeting room itself. We listen to each other, we share our own analysis or things we’re hearing from out in the districts and come to a decision on that at that meeting.
AS What about your personal take on two things: Could the economy withstand a rate hike? Should there be a rate hike?
WILLIAMS I think the economy could withstand a rate hike. A 25 basis point increase in short term interest rates alone doesn’t have that big of an impact on the economy. In terms of whether we should do that, I think it’s a balancing act. We’ve been going through this basically for the last year. Monetary policy takes a year or two to really work itself through the economy, so we have to be forward looking and think about where the economy will be in the future. I think things are looking good with unemployment 5% and inflation trends are moving in the right direction. But there’s a lot of uncertainty, a lot of issues about international developments and how they then affect the US economy. So we’re going to balance what I think of as pretty good news on the US economy, again some of the uncertainties about what’s happening around the world and how bad that affects our ability to achieve our goals.
AS Let’s talk a little bit about inflation because as we move towards full employment obviously that becomes a risk. Is that something that’s really factored in? Are you concerned about that right now?
WILLIAMS A couple years ago some people said the Fed talks too much about unemployment, and the reason we did was because unemployment was high. It was our biggest challenge from a monetary policy point of view. Now that unemployment is basically at or pretty close to most people’s views of full employment, inflation is the remaining issue that were grappling with. Inflation is running below our 2% target for around four years now and it is a concern. We want to see and I want to see inflation move back to 2%. I want to see it get there and I hope to see it there in the next year or two, but that is the thing that I’m most focused on. There’s a lot of disinflationary forces from around the world. The strong dollar obviously, but weak inflation in other countries have been holding US inflation down. My own view is with a strong US economy and with the dollar stabilizing and all prices stabilizing, inflation should be moving back to 2% in the next year or two. That’s definitely where my focus is.
AS So lack of inflation is the concern, not inflation itself. Let’s talk about employment. I know you’re pretty bullish on that picture right now. Even though we had a mixed report recently, I know you’ve said that you consider this to be more or less full employment. Is it reasonable to expect job reports of 200,000 at this point going forward?
WILLIAMS I think something that we have to start thinking about is what’s normal for the labor market. And given the demographics of our workforce and the trends there, I think getting about 80,000 jobs a month would be a normal rate of job growth. We’ve been getting over 200,000 for the last couple years a month on average and this year we’re running around that number. So we don’t need to see 200,000 jobs a month to think things are good. But you know, I do want to see job growth to be solid and I do look to see over two million jobs added this year on average. The thing about monetary policy makers: You don’t want to get caught up in one month of data or two months of it. Sometimes they come in really strong and it gets revised down. Sometimes it comes in a little weak.You know it’s just the ups and downs of this, so it’s really important to stay of calm through the ups and downs of the data flow.
AS Along similar lines, for Q1 we’re going to get another read on GDP or is that largely being discounted at this point?
WILLIAMS For Q1 the first reading we got was pretty anemic. Now my own staff in the San Francisco Fed and other economists have highlighted that there are some anomalous factors in the Q1 data especially around seasonal adjustment. So I think the data we are given was a little overly pessimistic view of underlying growth, but I am looking for Q2 to look better. I’m looking for solid growth of the least 2% of the second quarter. So one of the things I’m looking for and I think about is are the data consistent with my forecasts of about 2% growth for the year.
AS That’s pretty optimistic, right?
WILLIAMS Well, that’s what we got last year we got close to two percent growth last year you know we added two or three quarter million jobs last year I don’t think we’ll have that many jobs this year, given where we are, but still I think the US economy is actually in very good shape, despite the significant headwinds we’re experiencing from abroad.
AS What are the biggest risks you see to the economy?
WILLIAMS Well there’s some near term risks like Brexit, in terms of Britain, the vote they’re going to have in late June to possibly to leave the European Union. That’s something that obviously would have big impact on European economies. It would spill over into global financial markets, so that’s one of the very near term risks. China’s continuing process of pivoting from an export manufacturing driven economy to more of a consumer and services driven economy is something to watch carefully and how again that feeds back on global economic developments and back onto our shores. So those come nearer term next year or in some cases, next few months. Concerns that I have longer term, I am concerned by the fact that with many countries really struggling outside the US, getting inflation back to their goals. Europe and Japan are going to negative interest rates and QE. So that’s a kind of ongoing challenge in the global environment that we’re seeing in central banks when they’re getting their economies back on track.
AS Now it’s interesting to me, all those risks just mentioned were external, outside the United States, and this is an ongoing question: How much focus should the Fed have on developments outside the United States?
WILLIAMS Well it’s a great question because it sounds like I’m worrying about the rest of the world because I’m trying to be the central banker of the world, and that’s not the case. Our goals are very our domestic goals: domestic employment, domestic inflation. I think about global developments in terms of our ability to achieve maximum employment and 2% inflation. So it’s really thinking about how does the external environment, whether it’s Europe or Asia or South America, what have you, how does that feed back onto the US economy? And how does it inform what our policy decisions are? In the end the policy decisions are about achieving US domestic goals.
AS And what about equity prices in the United States?
WILLIAMS It’s my view that we want to look at all the financial conditions. Whether it’s equity markets or stock markets, bond markets, other markets in trying to discern basically what’s the overall underlying strength or factors affecting the economic outlook in the game. How does that feed into where the economy is and where our policy should be? Remember very low interest rates have been boosting asset prices in the US and around the world for years now and so the normalization of monetary policy also means some process of normalization of asset prices. So that’s an area where we’re clearly watching what’s happening in real estate markets and other asset markets to see how do they adjust to a somewhat higher interest rate environment.
AS Critics like General Wesley Clark have described this low interest rate environment as benefitting what he calls the “shareholder class” at the expense of other Americans. Do you think he’s on target there?
WILLIAMS First of all, the goal of monetary policy for especially for the last six to seven years is to get America back to work. We had 10% unemployment. Basically to achieve full employment, low interest rates got people back to work. That helps their pocketbooks, it helps them afford to to live. I think that from an income inequality kind of issue, it’s really helping a lot of regular folks be able to afford living. Now in terms of the longer-term goals, monetary policy only is a very limited or blunt tool. Our goal so to achieve maximum employment and price stability, as I said, so we’re driven by that and as we get back fully on track we’re going to move interest rates back to more normal levels. So in the end I think that income inequality, or these kind of issues that you raise, are things that are happening outside the realm of monetary policy. Maybe monetary policy affects on the edges, but really isn’t an important driving influence.
AS In a recent speech in Sacramento, where you’re from, you talked about the tech boom this time around not enhancing productivity, as much as some people might have anticipated. That’s because these developments were more about leisure and I guess you were talking about companies, not specifically but entities like Yelp and Snapchat and Facebook. Are these companies are particularly helpful to the economy then?
WILLIAMS It’s not a judgment about whether they help the economy or if they’re good or bad. It’s just trying to understand how come we’ve seen a slowdown in productivity of growth at the same time there’s been this amazing a wave of innovation, new ideas, new products that we all experience. That gets you back to how economists measure productivity. That’s the amount of output per unit of labor that’s happening at places that we work. One way to put it is a lot of these new innovations really are about how much consumers enjoy the information they can get. The amazing things that cats can do that we didn’t fully appreciate before, that’s actually good stuff. It’s just not measured in the output per hour statistics that economists focus on. Now one of the things I’ll just say is this isn’t just about measurement, that somehow the statisticians aren’t getting the data right or analyzing it right. It’s really not the case because it’s not affecting the productivity. In and among employers that seems to be very real. This is not a question of measurement. It’s really more a question of the fact that the new innovations are not fundamentally transforming what we produce or how we produce it. I have to add one last word, we don’t know what the future will hold. We’re not good at forecasting long run productivity trends, but so far we haven’t seen that transformative element of the new innovation that we saw you know back in the early part of the 20th century or we even saw during the late 90s with computers and the Internet.
AS Looking backward just a little bit: Do you think that the market turmoil in January and February was connected to the rate hike in December?
WILLIAMS Well, you’re asking me that so I’m going to say no. Maybe you’re going to call me defensive. I do think after we raised rates–– after seven years finally in December–– we didn’t see the turmoil then. There are international developments. Concerns about China and emerging market countries did come up earlier this year. The good news is that since the August turmoil of last year, things have calmed down quite a bit. I see markets conditions as being pretty calm and you know there doesn’t seem to be a lot of concern about either what the Fed’s going to do or global developments more generally.
AS Usually the Fed raises rates into a stronger economy. How is this cycle different from other cycles?
WILLIAMS Well I think one thing is that we’re trying to get it right. If you go back in history, I’m thinking back to the 60s and 70s, often waited around a little bit too long to start the tightening cycle when inflation had already taken off. Then they would have to raise rates rapidly, which caused the economy to stall and they’d have to cut rates. That was called the “stop go” policies. So one of the things we’re trying to do, in my view, is be very forward looking and think about although inflation is not quite to our goal, interest rates are very low and it’s time to take your foot off the gas very gradually over the next few years, so that we can get this smooth landing without the back and forth rates tightening and then having to let off. We don’t want to see our policy tightening create conditions that might cause a recession.
AS Is this more difficult though given that some countries are easing when we’re looking to tighten?
WILLIAMS Well economists have looked at that and it’s not really the case that all the countries around the globe in the past move together. This is not atypical, that certain major economies are going one direction while the US is going the other. It does create interactions in a global economy that we have to be cognizant of and study to the extent that the European Central Bank takes policy actions in response to their economic conditions that feeds back on the US. So we have to take all that into account, but I don’t think it makes it fundamentally more difficult. I do think that the fact that globally inflation is so low and that that does feed into the US economy is one of the major factors why, even though the economy’s done better, we still haven’t seen much inflation.
AS Could we see 3-4 rate hikes in 2017?
WILLIAMS In 2017? Yeah. I think that’s possible. Who knows what we’ll be doing, what we’ll see in terms of data and other information between now and then. Right now interest rates are incredibly low. We need to get back to something like 3% or 3.25% for a normal rate in the end and I think that based on my own view, doing that gradually over the over next few years probably makes sense.
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