The US economy remains on track for a gradual path of interest rate hikes and fears over the impact of a slowing global economy and bouts of financial volatility are overdone, San Francisco Federal Reserve President John Williams said yesterday.
“Others’ economic fates do not spell our own,” Williams said in a speech at the National University of Singapore on a trip to Asia.
“My view is essentially, let’s just stay on track. Let’s not get sidelined by the noise and distraction commentary can sometimes cause.”
The US central bank left interest rates unchanged two weeks ago and signalled its cautiousness by forecasting two further rate hikes this year, down from four at its December meeting, when the Fed raised rates from near zero for the first time in almost a decade.
But Williams, who has been consistent in providing a more upbeat assessment of the US economy over the past few months, said he expects the unemployment rate to fall to about 4.5% by late 2016 and for inflation to return to the Fed’s 2% target over the next two years.
“We’re not quite where I’d like us to be, but recent developments have been very encouraging and add to my confidence that we’re on course to reach our (inflation) goal,” he said, citing an uptick in oil prices and a stabilising dollar.
Overall, the US economy “keeps chugging ahead,” he said.
Asked about the inflation outlook, Williams said there were some encouraging signs in core inflation data.
“The last few months have actually been looking really good on CPI and PCE prices and I do want that to continue,” he said during an audience Q&A session.
“If it continues for the next few months, I will be pushing forward my inflation forecasts,” Williams said.
“There is some upside risk that we’ll hit our inflation target sooner.”
On the global front, where some of his colleagues argue that the US cannot uncouple itself from international economic and financial developments, Williams stressed that forecasts for global economic growth are far from dire.
The International Monetary Fund predicts about 3.5% global GDP growth this year, down only one-half percentage point from a year ago, he said.
“I don’t see a looming global crisis,” Williams said, adding that he continues to think China will avoid a hard landing.
Two Fed policymakers signalled last week that another rate increase could come as early as the Fed’s next meeting on April 26-27.
However, lacklustre consumer spending and inflation data on Monday curbed investor bets on when the next rate rise will be.
If the US economy performs as well as it did last year, it will be able to handle steady interest rate increases in 2016, Williams said.
“If we have inflation moving clearly towards 2%, if the US economy continues to improve the way it did last year...I think the economy could easily handle two or more (rate) increases this year,” he told reporters.
US interest rate futures currently suggest traders see a 12% chance of a rate hike next month, according to CME Group’s FedWatch.
As the global economy improves and policies normalise, there could be pretty large moves in long-term bond yields over the next several years, Williams said.