MNI ANALYSIS: Williams to Be Permanent Voter on FOMC

--Supports Gradual Rate Hikes

--Sees Trend GDP Growth at Just 1.75%, One of Lowest on FOMC

By Jean Yung

     WASHINGTON (MNI) - John Williams, who will ascend to the presidency of the

Federal Reserve Bank of New York on June 18, is set to have a permanent vote on

the FOMC as its second most powerful official. He has supported gradual interest

rate increases in recent months but also holds one of the most pessimistic views

on the potential output of the U.S. economy. 

     Currently chief of the San Francisco Fed, Williams, 55, an economist and

thought leader on monetary policy, will bolster the thinking at the top levels

of the U.S. central bank. His Ph.D. credentials should complement those of

President Trump's top appointees to the Fed, Chair Jay Powell and Gov. Randy

Quarles, both of whom are lawyers by training. 

     Williams is perhaps best known for his research on the natural rate of

interest, finding that it has fallen to historically low levels in recent years

and may remain there in the absence of a pick-up in productivity growth or other

structural changes. 

     He said in February that he sees the trend U.S. GDP growth rate at 1.75%,

at the low end of the range of 1.7% to 2.2% among his FOMC colleagues. He

expects growth to hit 2.5% this year, two-tenths below the committee median and

again at the low end of the range among all Fed officials. 

--SEES PRICES RISING

     "Given that the pace of growth is somewhat above trend, my view is that we

need to continue on the path of raising interest rates," he said in the February

speech. "This will keep the economy on an even footing and reduce the risk of us

getting to a point where things could overheat."

     Consistent with the core of the committee, Williams also expects wage

growth to drift higher as employers face a scarcity of qualified workers amid a

low jobless rate, remarking that low unemployment and a strong economy often

translates into higher inflation with a 12-month delay.

     Of the validity of the theory that falling unemployment leads to higher

price levels, Williams said: "Fear not, the Phillips curve is alive and will

soon be kicking!" 

--LOW R-STAR

     However, in light of low r-star, which he last pinned at just 0.5% in

November, Williams has called on Fed officials to rethink their 2% inflation

target. 

     In particular, he has backed price level targeting, an operating strategy

that would allow inflation to rise above 2% to make up for periods when it was

lower than 2%. 

     An r-star estimate of 0.5% would put the terminal fed funds rate at just

2.5%, little less than a percentage point above the current target range of

1.50% to 1.75%. 

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

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