The Federal Reserve should stick with its plan to raise interest rates gradually, a top policymaker said on Thursday, given his view that unemployment is headed to 4.5 percent by late this year and inflation is set to reach 2 percent in two years.
San Francisco Fed President John Williams said his outlook has changed little since December, when he and other U.S. central bankers raised interest rates for the first time in almost a decade and signaled they were inclined to hike borrowing costs four more times this year.
That was before a global stock market selloff fueled by fears of a renewed world downturn put the Fed on policy hold in January as it sought to assess the uncertain impact on the U.S. economy.
Williams, it appears, is no longer so concerned.
“Despite the Sturm und Drang of international and market developments, the U.S. economy is, all in all, looking pretty good,” Williams told an event organized by Town Hall Los Angeles. “I therefore continue to see a gradual pace of policy normalization as being the best course.”
Williams’ sentiments clash with those of many economists and investors who have increasingly bet that worsening global conditions, including a slowdown in China’s economy, will delay further monetary policy tightening, or even force the Fed to reverse course.
Economists polled by Reuters now see just two rate hikes this year. Traders are betting even odds at best of a single rate hike.
Williams told reporters after his speech that he was “not that concerned” about China data and that the chances of the Fed needing to stimulate the U.S. economy with negative interest rates were “very remote.”
U.S. lawmakers repeatedly asked Fed Chair Janet Yellen at her Congressional appearances last week what she thought of the viability of negative interest rates, a tool that the Bank of Japan, the European Central Bank and others have used to fend off dangerously low inflation and spark growth.
Negative interest rates, in which a central bank charges financial institutions that park money with it, are designed to spur lending by banks and borrowing and spending by businesses and individuals.
Williams told reporters if the U.S. economy worsened “significantly” the Fed had other stimulus options such as asset purchases.
He made it clear gradual rate hikes remain his preferred path, but reiterated the Fed’s view that policy will always be data dependant.