San Francisco Federal Reserve Bank President John Williams said Friday he sees a lower interest rate environment over the long run, with the Fed funds rate around 2%-2.5% at the end of 2016.
“Longer run growth trends in the U.S., and in the global economy, are lower than they were before, so view of potential output growth is more like 2%,” Williams said in an interview with CNBC. “What that implies is lower equilibrium, or real, interest rates in the future, relative to the past.”
“We’re in long run, we’re in an environment with lower real interest rates than we’ve seen in the past, maybe more like 2% real funds rate,” Williams said.
Williams, who will vote on the Fed’s policymaking Federal Open Market Committee next year, says he expects liftoff in 2015, adding he could see a rate “around 2%-2.5% at the end of 2016.”
Williams says he sees a 4% Fed funds rate is probably average in the long run, adding “these are really hard to know,” and at the end of 2015, he “would expect interest rates to still be relatively low.”
On the sidelines of the Stanford University’s Hoover Institute policy conference, Williams was optimistic about economic growth going forward.
“Our forecast still would say growth is here, about 2.5% on average,” he said. “So I do see a pretty good snap back in the second quarter and continuing good growth in the second half of this year, and going into next year with around 3%.”
But, Williams added, “the days of thinking we’re going to get 4% or 5% growth as part of the recovery, we’ve put that behind us, and really we’re thinking 2.5% to 3%.”
Williams said “the good news is that we’re on a growth path now,” pointing to jobs gains averaging 200,000 per month.
“I think we’re going to get to full employment and price stability – our Fed goals – within the next few years,” Williams said. “I feel good about the future, but it’s been a long slog.”
Williams expects unemployment “gradually declining over the rest of this year and next year, getting to about 6% at the end of this year and about 5.5% at the end of next year – pretty close to my view of full employment.”