US Federal Reserve Bank of San Francisco President John Williams said the central bank’s decision this week to keep its main interest rate near zero was a close one, and reiterated that he expects an increase in 2015.
“I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year,” Williams said in remarks prepared for a speech in Armonk, New York, on Saturday at a symposium on China and the US. “Of course, that view is not immutable and will respond to economic developments over time.”
Williams, a voting member on the policy-setting Federal Open Market Committee (FOMC) this year, highlighted concerns about stubbornly low inflation and growing risks from abroad as among the factors suggesting a patient approach to raising rates, despite US economic progress.
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The Fed has not raised interest rates since 2006, and more than half of economists in a Bloomberg survey had expected an increase this month.
“It was a close call in my mind, in part reflecting the conflicting signals we’re getting,” Williams said. “The US economy continues to strengthen while global developments pose downside risks to fully achieving our goals.”
The Fed’s two major objectives are to achieve maximum employment and stable inflation, which it targets at 2 percent.
The unemployment rate dipped to 5.1 percent last month, and Williams said he expects the US to reach full employment by the end of this year or next year. By contrast, inflation remains subdued, with the Fed’s preferred indicator at just 0.3 percent.
An alternate indicator that Williams watches closely, the trimmed mean, is also below target.
“Inflation is still lower than I’d like,” Williams said, attributing the weakness to a rising dollar and falling oil prices over the past year. “These effects should prove transitory. As they dissipate, I see inflation moving back up to our 2 percent inflation goal in the next two years.”
Still, economic conditions and policy “from China to Europe to Brazil” have boosted the dollar and held back growth and inflation, and continued problems abroad could exacerbate the effect, Williams said.
Williams’ speech in part echoed the FOMC’s statement, which said “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”
Recent losses in China’s equity markets may reflect deeper worries over growth prospects for the world’s second-biggest economy, and slowing demand from China has also helped trigger a global slump in commodity costs.
Williams on Saturday said that he does not see the situation in China as “dire,” characterizing it as a rebalancing as Chinese growth moderates to a more sustainable level.
Federal Reserve Bank of St. Louis President James Bullard said he pushed against the central bank’s decision to delay an interest rate increase, because the economy has more or less fulfilled policy makers’ goals.
“The case for policy normalization is quite strong, since Committee objectives have essentially been met,” Bullard said in slides prepared for a speech in Nashville, Tennessee. “I argued against the decision at the FOMC meeting.”
Bullard is not a voting member of the policy-setting committee this year, but will be next year.
Interest rates have been near zero since 2008 and the committee voted on Wednesday to keep them there, as financial market turmoil and slowing growth in China raised doubts about the outlook for US growth and inflation.
Fed Chair Janet Yellen said the Fed needed more time to assess the impact of slowing global growth, including China and emerging markets.
Federal Reserve Bank of Richmond President Jeffrey Lacker, an outspoken anti-inflation hawk who dissented in favor of higher interest rates at the Fed’s policy meeting on Thursday, said failing to tighten had raised the risk of “adverse outcomes” for the nation.
“An increase in our interest rate target is needed, given current economic conditions and the medium-term outlook,” Lacker said in a statement posted on the bank’s Web site on Saturday.
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