Fed's Williams: Rate Increases Needed to Keep U.S. Economy on Sustainable Path

Federal Reserve Bank of San Francisco President John Williams said it is necessary for the U.S. central bank to press forward with interest-rate increases, in part to reduce the risk that the economy might overheat.

The main goal of monetary policy right now is "to keep the expansion going as long as possible," Mr. Williams said in the text of a speech to be delivered in Australia. "That entails bringing monetary policy back to a more normal setting and taking actions to keep the economy on a path that neither exceeds its speed limit, nor stalls."

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When it comes to the Fed's inflation and hiring mandates, the economy is "as close to these goals as we've ever been," he said. And while inflation has been weak lately, tepid readings are likely to be temporary, with what is now a 4.3% jobless rate already under the point at which it could start to fuel inflationary pressures, Mr. Williams said.

"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. "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."

Mr. Williams spoke in the wake of the recent Federal Open Market Committee meeting that saw officials raise their short-term overnight interest rate target range to 1% and 1.25%. Officials also expect to raise rates one more time this year, and they have laid out a plan to begin a slow drawdown of their $4.5 trillion balance sheet later this year.

Mr. Williams is a close ally of Chairwoman Janet Yellen, who said after the FOMC meeting the case remains strong to continue to boost the cost of borrowing in the U.S. economy.

Other Fed officials have become more anxious, however. Two FOMC voters, the leaders of the Chicago and Dallas banks, have said they would need to see a pickup in inflation before they would support another rate increase. Another voter, Neel Kashkari of the Minneapolis Fed, argued the Fed's rate rise was a mistake given how far short price pressures are of the Fed's 2% inflation goal.

Most Fed officials believe a strong job market would eventually fuel higher inflation. Mr. Williams said in his speech he still expects to see the U.S. reach the Fed's price target by next year. Mr. Williams also said he expects the current jobless rate to remain just above 4% through the next year.

The central bank veteran said the main goal of monetary policy right now is to be "boring" and predictable and avoid rattling markets. He said the Fed is cognizant of the impact of its policies overseas as well.

Mr. Williams said that while the Fed doesn't know how much it would like to shrink its balance sheet, it will nevertheless be considerably smaller than its current size.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

June 26, 2017 01:14 ET (05:14 GMT)