San Fran Fed President: Gradual rate hikes key to US growth

With the US economy at full employment and inflation set to hit the Federal Reserve’s 2 percent target next year, the US central bank needs to continue raising rates gradually to keep the economy on an even keel, a Fed policymaker said Monday.

“If we delay too long, the economy will eventually overheat, causing inflation or some other problem,” San Francisco Fed President John Williams said in remarks prepared for a delivery to the University of Technology Sydney.

“Gradually raising interest rates to bring monetary policy back to normal helps us keep the economy growing at a rate that can be sustained for a longer time.”

Earlier this month, the Fed raised interest rates for the second time this year, signaling that it plans to raise them once more in 2017 and three times in 2018. But with inflation recently weakening and economic growth stuck at 2 percent, traders have been betting the Fed will end up moving much more slowly in the near future.

On Monday, Williams appeared keen to reset those expectations. Like Fed Chair Janet Yellen, Williams said he believes recent weak inflation readings will be transitory and forecast a return to 2 percent inflation by next year.

Williams said three rate rises this year and three to four next year would be fine as long as the economy progressed as hoped.

Williams reiterated the Fed’s plans to start shrinking its $ 4.5 trillion balance sheet this year. He also promised the Fed will normalize policy in a well- telegraphed, gradual manner so as to reduce unnecessary market disruption both at home and abroad.

“The more public understanding, the less chance that [ the Fed’s] actions will fuel unnecessary volatility in the markets,” Williams said.