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

Repeats Story Initially Transmitted at 22:16 GMT Aug 2/18:16 EST Aug 2
--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
MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com
MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com

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