San Francisco Federal Reserve President John Williams said Tuesday there's a "very strong case" for the Fed to raise interest rates next month if the economy continues to improve and policymakers are confident that inflation will pick up.
"Assuming the data are consistent with those (conditions), I think there's a very strong case for starting the process of raising interest rates" at the Fed's Dec. 15-16 meeting, Williams said in an exclusive interview with USA TODAY. "The next natural step...is to start raising rates and to do that gradually."
The Fed hasn't hoisted its benchmark rate in nearly 10 years, and it's been near zero since the 2008 financial crisis.
Williams' remarks are significant because he's a voting member of the Fed's policymaking committee and considered a centrist whose views generally align with those of Fed Chair Janet Yellen. Williams was Yellen's research director when she headed the San Francisco Fed. The Fed chair told Congress last week that a rate hike in December is a "live possibility," depending on economic reports in coming weeks.
Citing weak global growth and a still-fragile US economy, some Fed policymakers recently have advocated waiting until next year to lift rates to sidestep the risk of derailing the recovery, especially while inflation remains well below the Fed's 2% annual target.
But noting that unemployment is at a near-normal 5%, Williams said, "I don't see much evidence of fragility or lack of momentum…At some point, just the improvement in the economy with the passage of time starts to outweigh some of the concerns of potential risk."
He acknowledged lingering obstacles, which include overseas weakness that has strengthened the dollar, hobbled exports and curtailed inflation. But he added, "Despite the headwinds and despite all the concerns about the risk, we still seem to plow ahead with 2% (annual) growth."
In September, the Fed held off on a rate hike because of China's economic slowdown and concerns about ripple effects on other countries in the region, emerging markets and even the U.S. economy. But, Williams said, "Those risks have not materialized."
He acknowledged that global troubles and market volatility contributed to slow U.S. payroll and consumer spending growth in August and September. But he called that "a blip" and said recent economic data "have been pretty positive."
Last week, the Labor Department said employers added a blockbuster 271,000 jobs in October and the unemployment rate fell to 5% from 5.1%.
Noting the global turmoil has been more than offset by solid consumer spending and a recovering housing market, he said, "We're in an economy that's been growing for many years." He added, "We're in a much better place than we were a few years ago."
Starting to raise rates sooner rather than later will allow the Fed to push them up gradually and avoid the eventual risk of a run-up in inflation, Williams said. He said that if the economy weakens, "We can stop raising rates" or pause.
The Fed, he added, would be prudent to act before inflation heats up as monetary policy affects the economy with a lag. "If we just sit on our hands for too long," unemployment that dips to 4.5% could stoke eventual inflation. He said inflation has been restrained by temporarily low oil prices and a strong dollar but he's confident it will accelerate because the economy is already near full employment.
Financial markets are so accustomed to near-zero rates that "there's just a lack of muscle memory," and investors fear the unknown, Williams said. But he doesn't expect a quarter-point bump in the rate to have much impact on growth.
It can even send a positive signal to consumers and businesses, Williams said. People think, the Fed "may not be raising rates because (it knows) something we don't know."