Fed's Williams: Still See 1 More Rate Hike This Yr; 3 Next Yr

--September Good Time to Start Paring Back Reinvestment

--Underlying Inflation Trends Positive; See Hitting 2% Goal

--Running Economy Too Hot For Too Long Creates Risks

By Jean Yung

     LAS VEGAS (MNI) - Despite expressing his frustration with inflation, San

Francisco Federal Reserve Bank President John Williams said Wednesday the data

has not prompted him to change his view on the appropriate path of monetary

policy in the near term. 

     He still thinks it makes sense to raise the Fed's benchmark interest rate

by another 25 basis points by the end of the year to a 1.25% to 1.50% target

range and begin reducing the central bank's balance sheet at the September

Federal Open Market Committee meeting. 

     "I think the basic path that was laid out in the median dots in the (June)

economic projections still makes sense to me," Williams told reporters after

speaking to the Economic Club of Las Vegas. 

     "Maybe one more increase this year, something like three increases next

year is appropriate given that our labor market is as strong as it is, given I

expect inflation to be moving back to 2%," he said. "So I'm comfortable with

that, but the exact timing will depend on how the economic outlook evolves." 

     The bigger issue for the San Francisco Fed chief is the very low level of

the longer run real neutral rate of interest, or r-star, an area of research in

which he specializes. He estimates that rate -- at which monetary policy is

neither accommodative nor stimulative -- to be currently at around 0.5%, or 2.5%

factoring in inflation. 

     "We're kind of halfway there already," he said. "So even for someone like

me who is optimistic about inflation moving back, I still don't see the need to

raise rates quickly because we don't have that long to go to get to a neutral

interest rate." 

     The economy is currently "in a good place," said Williams, who does not

vote this year on the rate-setting FOMC. 

     The unemployment rate, currently at 4.4%, is below his estimate of its

longer run natural rate of 4.75% and could fall to as low as 4.1% by the end of

the year, he said. 

     "I just think we don't want to let this go too long because eventually

inflation pressures will emerge at some point," he said.  

     "I do want to see inflation move up a little bit," but "if job growth

continues at this 180,000 number, we're going to see unemployment just going

further and further below and that will create risks," Williams said.

     He repeated the FOMC and Chair Janet Yellen's view that one-off factors

like cellphone plan prices have held down inflation so far this year. The core

personal consumption expenditures price index rose 1.5% in June from a year

earlier.  

     He's "getting a little frustrated with inflation refusing to come up to 2%

as quickly as hoped," he said. "Still I think underlying inflation trends are

positive." 

     Overall for businesses, there is a sense that the economy is doing well,

Williams said, and that is true with or without the prospect of a fiscal

stimulus from the Trump administration or Congress via tax cuts or looser

regulation. 

     Lawmakers have yet to work out a plan to raise the U.S. debt ceiling, and

the deadline for doing so is set to come around the time when the FOMC will

likely begin to reduce reinvestment in Treasuries in October. 

     But Williams said he is "hopeful that we will find a way to resolve this

uncertainty around the debt ceiling issue in a timely manner."

     Depending on what happens and how data comes in, the Fed also "has the

ability to adapt or be flexible about what's going on," he said. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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