Fed's Williams sees gradual U.S. rate hike path as 'best course'

February 18, 2016 03:16 PM

The Federal Reserve should stick with its plan to raise interest rates gradually, a top policymaker said on Thursday, given his view that unemployment is headed to 4.5% by late this year and inflation is set to reach 2% in two years.

San Francisco Fed President John Williams said his outlook has changed little since December, when he and other U.S. central bankers raised interest rates for the first time in almost a decade and signaled they were inclined to hike borrowing costs four more times this year.

That was before a global stock-market selloff fueled by fears of a renewed world downturn put the Fed on policy hold in January as it sought to assess the uncertain impact on the U.S. economy.

Williams, it appears, is no longer so concerned.

"Despite the Sturm und Drang of international and market developments, the U.S. economy is, all in all, looking pretty good," Williams said in remarks prepared for delivery to Town Hall Los Angeles. "I therefore continue to see a gradual pace of policy normalization as being the best course."

Williams' sentiments clash with those of many economists and investors who have increasingly bet that worsening global conditions will delay further monetary policy tightening, or even force the Fed to reverse course.

Economists polled by Reuters now see just two rate hikes this year. Traders for their part are betting even odds at best of a single rate hike.

U.S. lawmakers repeatedly asked Fed Chair Janet Yellen at her Congressional appearances last week what she thought of the viability of negative interest rates, a tool that the Bank of Japan, the European Central Bank and others have used to fend off dangerously low inflation and spark growth.

Negative interest rates, in which a central bank charges financial institutions that park money with it, are designed to spur lending by banks and borrowing and spending by businesses and individuals.

Williams made no reference to any possibility of further monetary policy easing in his prepared remarks, and he made it clear that gradual rate hikes are still his preferred path, even as he reiterated the Fed's view that policy will always depend on the data.

Recent data have by and large been good, with unemployment dropping to 4.9% in January and signs of industrial output strong.

Williams suggested the real picture could be even stronger. While the downward pressure on inflation from falling oil prices and a stronger dollar will likely peter out, he said, upward wages prices are actually stronger than overall figures suggest.

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