San Francisco Federal Reserve Bank President John Williams Thursday called it “reasonable” to expect the first increase in short-term interest rates to come in the middle of next year, but stressed that it is economic data that will influence exactly when the central bank springs into action.
“Thinking around summer of 2015 for the first rate hike is a reasonable guess given where we think the economy is going and how much progress we are making towards our goals,” Williams told CNBC in an interview on the sidelines of the Jackson Hole Economic Symposium.
He will hold a voting position on the policymaking Federal Open Market Committee in 2015.
Williams also echoed comments contained the minutes from the July FOMC meeting, indicated the Fed could move up the timing of its first interest rate hike if incoming information shows the economy is on a faster march towards the central bank’s employment and inflation objectives.
“It really depends on the data,” Williams emphasized. “If the data really gets stronger, then it could be a little earlier, if the data disappoints it could be a little later.”
Asked to comment on the current state of the labor market, Williams noted improvement across a broad set of labor market indicators – from job growth to job openings. “So we are really seeing improvement broadly across a lot of categories,” he said.
“The long-term unemployment is coming down too, and that’s a really positive sign for the labor market,” Williams added.
After the first step to tighten monetary conditions, Williams said subsequent actions will depend on how the economy progresses. “I would expect us to be pretty gradual in raising rates, the economy still is not robust,” he said.
Right now he said he does not see any risks to the economy or financial system, although there are signs of excesses in certain areas – such as the leveraged loan market.
As for the risk posed by keeping interest rates close to zero for so long, Williams noted that wage growth remains modest and inflation is running below the FOMC’s 2% target. In his opinion, a normal rate of wage growth would be more along the lines of 3% to 3.5%.
Looking ahead, “I expect inflation to only gradually come back,” he said.
And the absence of any “convincing” signs of an uptick in wage growth shows that there is still slack in the labor market, “and we still have a ways to go in getting our economy back to full employment,” Williams said.