|
 Concern that it could be forced to retreat to near-zero interest
rates, where the Fed has little room to maneuver, if it pulled the
trigger too soon has been a significant reason the Fed has kept
rates pinned to the floor well into the recovery. With that less of
a threat, policymakers can now focus on charting an appropriate rate
path and worry less about sliding back to zero, Williams said in an
interview late on Friday, expressing a view that appears to have
taken root more broadly at the central bank.
"As we go through time, that probability of saying 'well, the shocks
are going to push us back,' seems to be less, seems to be
decreasing," said Williams, who this year is one of 10 voting
members of the Fed's policy panel and whose views are seen as
closely aligned with Chair Janet Yellen.
"More importantly, we are really thinking about a path, we are
talking about moving interest rates from zero to a normal level over
several years," he said, echoing recent comments by several other
Fed policymakers.
"So even if the economy got some bad shocks, really you are probably
just talking about flattening that path out a bit, or maybe raising
rates more slowly."
LIFT-OFF, DATA AND T-SHIRTS
To get that message across Williams has begun giving away T-shirts,
printed at his own expense, showing an arrow busting upwards out of
a computer and declaring: "Monetary policy -- It's data dependent."
The slogan captures a shift increasingly evident in the language of
some of the Fed's most influential policymakers - away from concerns
about acting “too early” toward a focus on calibrating rates in a
way that will sustain steady recovery.
In fact, the Fed now needs to weigh the risks of waiting too long
before a rate lift-off, Williams said. The concern is a late start
to rate increases could force the Fed to tighten policy more
aggressively and potentially disruptively if stronger economic
growth sparks inflation pressures.
"A little earlier and more gradual versus later and more aggressive:
those are the options we have," Williams said.
To be sure, some policymakers, notably the presidents of the
Minneapolis and Chicago Fed banks, still argue that raising rates
too soon poses a bigger risk than waiting too long.
Economists last month pushed their expectations of a rate hike later
into 2015 from mid-year after the Fed downgraded its economic
outlook. However, recent policymaker comments suggest the Fed would
be still poised to act if data over the next two months confirmed
continued job growth and an expected rebound from the weak start to
the year.
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In the last two weeks, three Fed governors have laid out the
argument that it is the longer rate path, not the date of lift-off,
that matters. Jerome Powell in New York last week made the direct
case that the Fed should not wait to act until its goals of full
employment and 2-percent inflation are in view.
As the U.S economy nears full employment, there is less need to keep
rates near zero for long to compensate for the central bank's
inability to cut rates further in case of a shock, Williams said.
He also said that regardless of the timing of the first hike, rates
should stay below neutral to help the economy grow at a
faster-than-normal pace. Such accommodative policy is necessary to
further reduce unemployment, which at 5.5 percent is still too high
in his view, and push up inflation, which remains well below the
Fed's 2-percent target.
The San Francisco Fed chief expects the U.S. economy to reach full
employment in six to twelve months, and forecasts a tighter labor
market will start lifting wages and inflation more broadly.
Comments from Fed officials and forecasts published in March suggest
a majority of policymakers is prepared to raise rates either in June
or during the June to September period, but Williams declined to be
pinned down.
"June is a long ways off, we’ll get more data before June," he said.
"I am not going to talk about June or September. Look at the shirt!”
(Additional reporting by Howard Schneider and Jonathan Spicer;
Editing by Tomasz Janowski)
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