San Francisco Federal Reserve President John Williams yesterday made the case for further gradual increases in interest rates, saying he expects inflation to rise to the Fed’s 2 percent target next year as unemployment edges lower.
“Gradually raising interest rates to bring monetary policy back to normal helps us keep the economy growing at a rate that can be sustained for a longer time,” Williams said at University of Technology Sydney.
Williams’ comments suggest that he is lining up with Fed Chair Janet Yellen, his predecessor at the bank, in an emerging debate on how to respond to easing inflation during the past few months.
While some Fed officials have argued for a pause in rate hiking to wait for clearer signs that inflation is indeed headed higher, Yellen has played down the significance of weak price data and suggested that the Fed remains on course for higher rates.
Williams seemed to agree.
“Some special transitory factors have been pulling inflation down,” he said. “But with some of these factors now waning and with the economy doing well, I expect we’ll reach our 2 percent goal some time next year.”
Those special factors include a steep drop in the cost of mobile-phone services, which helped pull down the Fed’s favorite inflation gauge to 1.7 percent in April from 1.9 percent in March and 2.1 percent in February.
Williams also saw danger in the Fed allowing the unemployment rate to fall too far.
“The very strong labor market actually carries with it the risk of the economy exceeding its safe speed limit and overheating, which could eventually undermine the sustainability of the expansion,” he said.
At 4.3 percent last month, the US jobless rate was already below what Williams thinks is its long-run sustainable rate of 4.75 percent, and he sees it dropping further.
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