SF Fed's Williams: Rate Remain Low, Expects More Hikes

--If FOMC Delays Too Long on Rate Hikes, Econ Could Overheat, Infl Emerge

--Expects to Reach Fed's 2% Inflation Goal This Year or Two

--FOMC Should Commence With Plan to End Reinvestments 'This Fall'

By Karen Mracek

     WASHINGTON (MNI) - San Francisco Federal Reserve Bank President John

Williams continued to call for additional hikes in the fed funds funds rate, and

said it would be appropriate to start trimming the reinvestment of the Fed's

holdings "this fall."

     Even with the three quarterly increases in the fed funds rate since

December, "rates remain low," Williams said in remarks prepared for the Economic

Club of Las Vegas.

     "So we've indicated that we expect that economic conditions will warrant

further gradual increases in the future," he added.

     Williams, who is a 2018 voter on the policymaking Federal Open Market

Committee, did not say exactly when he thought another rate hike would be

appropriate. 

     But, he said, "To keep the economy on a sustainable path of growth, we need

to gradually reduce the monetary stimulus put in place during the recession and

recovery."

     Williams, who served as Fed Chair Yellen's research director when she was

head of the San Francisco bank, warned "If we delay too long, the economy will

eventually overheat, causing inflation or other imbalances to emerge."

     At some point, that puts the FOMC "in the position of having to quickly

reverse course to slow the economy," he said, and "that risks stalling the

expansion and setting us back into recession."

     The FOMC can continue to normalizing rates because "the U.S. economy is

about as close to these goals as we've ever been," he said. 

     The unemployment rate, which was 4.4% in June, is below the neutral rate,

which Williams estimates at about 4.75%. This means "we've not only reached the

full employment mark, we've exceeded it," he said. The July jobs numbers are due

out Friday.

     "Given the strong job growth we've been seeing in the United States, I

expect the unemployment rate to edge down a bit further this year and then

remain a little above 4% through next year," he said.

     As for inflation, "we still have a ways to go," Williams admitted, though

he said in recent months, "some special transitory factors -- like sharp

declines in prescription drug prices, airfares, and especially wireless service

fees -- have been pulling inflation down."

     As these transitory factors "wane," he said, "I expect that we'll reach our

2% goal in the next year or two."

     Even with the weaker than expected inflation data, Williams is ready to

move on the Fed's plan to reduce its balance sheet. "My own view is that it will

be appropriate to start this process this fall," he said.

--MNI Washington Bureau;tel: +1 202 371-2121; email: karen.mracek@marketnews.com

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