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Fed's John Williams: 3 or 4 Rate Hikes Still Warranted in 2018

Fed's John Williams: 3 or 4 Rate Hikes Still Warranted in 2018
(Geozacho/Dreamstime)

Tuesday, 15 May 2018 02:00 PM

Federal Reserve Bank of San Francisco President John Williams said he’s “very positive” about the economic outlook both in the U.S. and abroad and reiterated that he views three to four interest-rate increases this year as appropriate.

Williams, who will take the helm of the New York Fed on June 18, said Tuesday that inflation is nearing the central bank’s 2 percent target after a temporary slowdown last year and noted that unemployment is at its lowest since 2000, shoring up his confidence in the outlook.

Investors expect the Fed to raise borrowing costs for a second time this year when they meet in June and see the likelihood of three or four moves for the year as a whole as roughly balanced.

Still, Williams cautioned that he still sees the so-called neutral rate remaining lower in the longer run, limiting how high the Fed will be able to raise interest rates over the course of its tightening cycle before restraining growth. Williams is among the foremost researchers focused on the longer-run outlook for rates.

“With a new normal for short-term rates of around 2 1/2 percent, interest rates are likely to remain low relative to historical experience,” he said in the text of remarks to the Economic Club of Minnesota in Minneapolis.

Williams sees the neutral rate -- the real rate expected to prevail when the economy is at full strength -- around 0.5 percent today, or around 2.5 percent when accounting for inflation around the Fed’s 2 percent goal. That’s low by historical standards: a “normal interest rate” was roughly 2 percentage points higher 20 years ago.

Some economists have recently suggested that the neutral rate could rise, but he isn’t sold.

“I don’t yet see convincing evidence of such a shift,” Williams said. He’s equally cautious when it comes to productivity, which has also slowed and is one of the drivers behind lower rates. “While I can hope we’re on the brink of another game-changing invention like the internet, for the moment, the data indicate productivity growth is still stuck in low gear.”

Williams said economists can expect recent U.S. fiscal stimulus to increase the neutral rate, which he calls r-star, by no more than 0.25 percentage point over the next decade.

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Federal Reserve Bank of San Francisco President John Williams said he’s “very positive” about the economic outlook both in the U.S. and abroad and reiterated that he views three to four interest-rate increases this year as appropriate.
fed, rate, hikes, john williams
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2018-00-15
Tuesday, 15 May 2018 02:00 PM
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