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Fed should not raise rates when no one is expecting it: Williams

The Federal Reserve should be communicating its views of the economy well enough that markets will not be taken by surprise by an eventual interest-rate hike, a top U.S. central banker said on Tuesday.

While it is not a problem if traders are not fully pricing in a rate increase before it happens, "it shouldn't be the case that no one is expecting a rate increase," San Francisco Fed President John Williams told reporters after a speech here.

John Williams holds a T-shirt on CNBC's "Squawk On the Street," Monday, May 11, 2015.
Source: CNBC
John Williams holds a T-shirt on CNBC's "Squawk On the Street," Monday, May 11, 2015.

The comments suggest that the Fed must do quite a bit of communicating if its officials are to feel comfortable raising rates this year, as Williams says he thinks will be appropriate.

The Fed last month held off on raising interest rates, citing concerns about global risks and low inflation.

Interest rates have been near zero for almost seven years now, and the last time the Fed raised rates was in 2006.

"We are essentially at full employment," he said. "We have to keep an eye on where the goal posts are."

Since the Fed's September meeting, Williams said, there have been no signs of a worsening global outlook, and while recent trade data was worse than expected, data on consumer spending has topped his expectations.

The labor market, in his view, continues to improve, a key metric as the Fed considers a possible rate hike at its last two meetings of this year, in October and December.

A government report last Friday showing the U.S. economy added only 142,000 jobs in September, many fewer than expected, convinced many traders that the central bank is now much less likely to raise rates before the end of this year.

Interest-rate futures are currently pricing in the first better-than-even chance of a rate hike for the Fed's March meeting.

Williams sought to counter that view, saying the economy will soon need no more than 100,000 new jobs a month to feed a healthy labor market.

"Every time we add jobs we are actually moving down the field," said Williams, an avid fan of the San Francisco 49ers football team.

Unemployment is at 5.1 percent; full employment for the U.S. economy, in his view, is around 5 percent.