San Francisco Fed boss eyes December rate hike

The San Francisco Fed boss says the best time for the bank to raise rates again will be its last meeting this year.

San Francisco Federal Reserve President John Williams. Picture: Kevork Djansezian/Bloomberg News.

Federal Reserve Bank of San Francisco President John Williams said the best time for the US central bank to raise rates again likely will be at its policy gathering in December.

Mr Williams still expects one rate increase this year, and said it could happen at either of the two remaining rate-setting Federal Open Market Committee meetings in 2016.

But it could be better to wait a bit longer to boost what is now a 0.25 per cent to 0.50 per cent overnight target rate range, he said in an interview Monday with The Wall Street Journal. That’s because Fed Chairwoman Janet Yellen will have a press conference at the Dec. 13-14 meeting, but not at the gathering scheduled for Nov. 1-2.

“We can always take policy actions at any meeting, but I think there are some advantages, in my own mind, around a press conference,” Mr Williams said in the interview.

“There is always the issue of wanting to communicate [the rate action] as effectively as we can,” Mr Williams said. When raising rates, “there’s always a little bit of a preference, in my view, around a press conference meeting since we’re still in the early days of this normalisation process.” The December press conference would allow Dr Yellen to better explain the Fed’s decision beyond the relatively brief policy statement released after FOMC meetings, he said.

“It was helpful last year to have our first rate hike be at a time when the chair could explain the reasoning, the logic and the plans at a press conference,” Mr Williams said of the Fed’s December 2015 rate rise.

Mr Williams said concerns about acting just ahead of the US presidential election aren’t part of his calculus. He played down fears the Fed might unsettle markets just ahead of the vote and said the election wasn’t an “important consideration” to him in thinking about when the Fed should move.

There is support among Fed officials for an increase in the cost of borrowing this year, and some are itching to act sooner rather than later: Three FOMC voters dissented against a majority vote to hold rates steady at their September gathering. That said, officials like New York Fed leader William Dudley have indicated the final meeting of the year would be the best time to act, given that there is little urgency to move aggressively with inflation still below the Fed’s 2 per cent target.

Mr Williams has been a steadfast supporter of raising rates throughout 2016, but central bankers have confronted an economy that hasn’t allowed them to raise rates as swiftly as they expected last December. Mr Williams remains upbeat the Fed can proceed with rate increases next year.

If inflation can continue to move up toward the central bank’s target and the jobless rate ticks down to around 4.75 per cent from its current 5 per cent, “we do need to keep moving on raising interest rates faster than one increase a year. But we don’t have to raise them more than at a gradual pace, I think, given the economic environment we face ... We can raise them very gradually over the next couple of years,” Mr Williams said.

Given changes in the economy that have appeared to lower the natural rate of interest, the Fed likely will raise rates to a lower level than experience suggests is likely, Mr Williams said.

“We’ve got some developments over the last year that have fundamentally changed a little bit the kind of the slope of the pace of rate increases I think are appropriate,” Mr Williams said. “The fact that unemployment hasn’t come down from last year means we do have a little bit more room, we have more room to let the economy grow strongly, and that’s good.”

Mr Williams said he believes the risks to the economy are largely balanced. He added that he doesn’t see any major source of financial instability, which can be an issue when short-term rates are at very low levels. He countered those who believe aggressive Fed actions have unnaturally pumped up the stock market. Some fear an implosion in equity prices the more the Fed raises rates.

“The high level of prices in the stock market really does reflect the fact that the rate of return in other investments is low,” Mr Williams said. “We are not seeing the kind of crazy stock market build-up like we saw in the late 1990s, where the market was basically feeding on itself to go higher and higher. I don’t see that type of dynamic in place at all.”

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