Fed's Williams sees 'ways to go' before rates pinch growth

  • With "a ways to go" before higher interest rates will start to slow the U.S. economy, Federal Reserve Bank of New York President John Williams on Friday endorsed the idea that the Fed will raise rates once more this year and three times next year.
  • Last week the U.S. central bank raised interest rates for the third time this year, with the median of freshly published Fed forecasts showing policymakers expect to reach a policy target of 3.1 percent by the end of 2019, a full percentage point higher than the current rate.
  • To Williams, the report signaled a strong job market and economic momentum, but with very few signs of inflation from wages or elsewhere, gradual interest rate hikes remain the "right path" for the Fed, Williams said.
John Williams
Michael Short | Bloomberg | Getty Images
John Williams

With "a ways to go" before higher interest rates will start to slow the U.S. economy, Federal Reserve Bank of New York President John Williams on Friday endorsed the idea that the Fed will raise rates once more this year and three times next year.

Last week the U.S. central bank raised interest rates for the third time this year, with the median of freshly published Fed forecasts showing policymakers expect to reach a policy target of 3.1 percent by the end of 2019, a full percentage point higher than the current rate.

"I think if you look at the center of the range... these are really pretty reasonable views of where the economy is likely to go and where policy needs to go in terms of sustaining this expansion," Williams said in an interview on Bloomberg Television.

At the same time, he said, "We have a ways to go to get to some idea of what people think of as neutral," referring to the theoretical "neutral" level of interest rates, at which borrowing costs neither stimulate nor restrain economic growth.

Fed officials currently estimate that rate at about 3 percent, but Williams said "we don't really know" where neutral is. As one of the few economists who have done ground-breaking work on estimating the neutral rate, his comment adds to a growing view that the Fed is relying less on the estimate of neutral to gauge how far to raise rates.

Fed Chair Jerome Powell signaled in August that he is not inclined to look to "neutral" as a guidepost for setting policy.

Williams, who of all the Fed presidents works closest with Powell to formulate the Fed's messaging, said on Friday that while neutral will play a role in setting rates, it is just "one piece of the puzzle" that also includes a close look at "wage growth, inflation, job growth, GDP growth: We look at a lot of indicators both in the U.S. and abroad."

U.S. job growth slowed sharply in September, likely as Hurricane Florence depressed restaurant and retail payrolls, a report released earlier on Friday showed, but the unemployment rate fell to near a 49-year low of 3.7 percent.

To Williams, the report signaled a strong job market and economic momentum, but with very few signs of inflation from wages or elsewhere, gradual interest rate hikes remain the "right path" for the Fed, Williams said.