Fed official: ‘We’re in a good place’
John Williams’ go-to analogy is the “Goldilocks” fable, which makes perfect sense for a Federal Reserve Bank regional president who helps set interest rates for the world’s most powerful country.
The economy, he says, should not be too hot nor too cold. It should be just right.
What exactly does “just right” look like? According to Williams, we’re about to find out.
After the Great Recession ended eight years ago, the Federal Reserve helped rescue the economy by keeping interest rates near zero and buying trillions of dollars of government debt.
Recently, though, the central bank has pulled back. The Fed stopped bond purchases in 2014, and in December it raised short-term interest rates to a range between 0.5 percent and 0.75 percent. The bank also indicated that it will raise interest rates three times this year.
The stage is now set for Congress and the White House, not the Fed, to boost the economy, Williams says, through policies like tax reform and infrastructure spending. And since Republicans will soon control both institutions, the chance of an economic stimulus becoming law is quite high. That’s one reason the Dow Jones industrial average has jumped more than 8 percent since the election in November.
Interestingly enough, Williams thinks ideal gross domestic product growth should be around 1.5 to 2 percent a
year, which is the same modest rate the economy has been growing under the Obama administration. Williams and the Fed want steady, sustainable growth led by fiscal policy, not monetary policy — avoiding the boom-and-bust cycles that have marked the 21st century thus far.
“There are advantages to a slow recovery,” said Jerry Nickelsburg, an economist and professor at UCLA Anderson School of Management. “You don’t have imbalances. It’s like having small earthquakes to ease the pressure of a big one.”
A native of Sacramento, Williams joined the Federal Reserve Bank in San Francisco in 2002, having earned degrees from Stanford, the London School of Economics and UC Berkeley. He became president of the San Francisco Fed in 2011, succeeding Janet Yellen, who eventually became Fed chairwoman.
I chatted with Williams last week in his San Francisco office about the possibility of a tech bubble, consumer spending and international trade. The interview has been edited for length and clarity. Q: Does raising interest rates mean the Fed thinks Congress and the White House should replace the bank as the institution that boosts the economy? A: Absolutely. As we achieved our cyclical goals, we are stepping back and setting monetary policy at a more neutral rate. We’ve done our job to get the economy back on a sustainable growth path. Monetary policy in the end can’t change the growth rate, the number of jobs, productivity over the long term. It’s really important for us to stop thinking about monetary policy as the cure for what’s happening.
We really need to think harder about what policies will put our overall economy on a stronger, more sustainable path. Taxes, regulations, education, job training, research and development, infrastructure spending — things that can have an effect in the long run on productivity. Short run, we’re in a good shape. The critical issue for our country are these longer-term issues, getting our workers to get the skills, training and preparation to have success in the economy of the future. Q: Some economists think the U.S. economy, and indeed the world, fundamentally changed after the Great Recession, that we’ve entered a new period where consumers have dramatically cut back purchases. Do you think consumer spending will ever return to pre-2008 levels? A: I hope not. I hope we don’t get back to 2007. That was an economy in which we were borrowing too much. We were spending too much. It was an economy that was fundamentally fragile. We need to get back to a balance. I think we’re close to that. The overhang from the housing crisis has nearly run its course. The savings rate is higher than what it used to be. The household sector has gone from being excessively optimistic to being excessively pessimistic, and now we’re moving back to something more normal.
In the big picture, this 2016 economy was too hot. We don’t want to be the 2010 economy, which was too cold. We want to see the economy grow at 1.5 or 2 percent a year. We want to see positive job growth, but we need to slow down, because we don’t want to push the economy too hot. We’re in a good place with the national economy.
(Last month, Williams told me he found it highly unlikely that President-elect Donald Trump can push GDP growth to more than 4 percent, as he has said he plans to do. “If you really want to bend the curve, you really have to think about major transformative changes to what we’re making and how we’re making it,” he said. “You can go back to electrification of homes and factories. Or automobiles. Those were huge breakthroughs, and they gave us decades of faster growth.”) Q: President-elect Trump has been very skeptical about international trade. What are your thoughts? A: With global growth slowing, that does have important implications for U.S. economy. In a slower-growing economy, we are all more susceptible to spillovers across countries in terms of shocks. If Europe or Asia gets hit hard, the spillover to the rest of the world is even a little bit greater when you start at a pretty low growth rate. The ability for monetary policy to respond to shocks is more limited in a slower growing economy.
By having an open economy, we worry about the downside risk. We also have the positive effects too. When we get hit by ups and down in our economy, for whatever reason, the rest of the world can be a buffer for us. When we’re slowing down, we can export more abroad. Q: As you know, the San Francisco economy is booming, which makes it an outlier compared to the rest of the country. How much does living in San Francisco affect your views when you meet (Fed Chairwoman) Janet Yellen and the other members of the Open Market Committee to set interest rates? A: That is something you have to recognize as a human being, that every day I feel like we’re in a booming economy. It’s important to understand that the Bay Area is not representative of the country’s economy. We’re making sure we’re hearing from all parts of our district. That helps to undo a little of the home bias.
As we analyze the data, we’re looking at what’s happening in the broader economy. It’s not just the Bay Area that is hot and everyone else is cooling. Seattle, Los Angeles, Utah, Idaho are doing well too. Through my meetings, my travels, I’m making sure I’m getting the big picture from the areas that are not doing as well. Q: Do the other regional bank presidents ask you why the Bay Area is doing so well? A: Of course. They hear about it all of the time. It’s a fact that the West Coast is a center of innovation for the country. People are very interested in what’s happening in my district, especially with technology and trade with China. Q: Is the tech-fueled economic boom in San Francisco and the Bay Area real? Or are we in a bubble? A: In Silicon Valley, there are going to be a lot of failures. There’s going to be a lot startups that don’t make it to the market. I don’t worry so much about what’s the IPO of some startup. To my mind, what’s more important is what are the underlying trends, where the (research and development money) is being spent, what kind of new innovations are happening. Are they selling things? In the late 1990s, the dot-com boom was fueled by businesses that didn’t have a way to make money. They were hoping to make up for that with volume. Today, a lot of big employers have plenty of money.
Our underlying innovation economy — outstanding world class universities that both educate business leaders and engineers combined with startup, venture capital culture — has proven to be successful for many decades. I expect that to continue.
What I worry about is that when times are good, it’s human nature to extrapolate from that and think we’ll never have a downturn. We see that in the stock market. That’s a potential risk to our economy. Right now, the overall stock market valuation doesn’t seem to be that disconnected from the fundamentals. As we raise interest rates, that will be a little bit of a stress test for valuations. We’ll see how the markets react to that. I do worry that some valuations are built around the assumption that interest rates will stay very low for a long time.