The risk that a weak economy could force the Federal Reserve to return rates to zero is shrinking, Federal Reserve Bank of San Francisco President John Williams said Monday.
In an interview with Reuters, Williams downplayed worries that the central bank might have to take a step back after it begins raising rates. Short-term interest rates have been around zero for more than six years, and the Fed is expected to begin raising rates back into positive territory sometime this year.
Although money watchers warn that turning off that easy source of cash could cause the economy to swoon again, Williams said that the “probability of saying ‘well, the shocks are going to push us back,’ seems to be less, seems to be decreasing,” addressing an important reservation of some Fed officials.
Williams succeeded Janet Yellen at the head of the San Francisco regional bank after she became chairwoman of the Fed. He is also a voter this year on the Fed’s monetary policy committee as it contemplates raising its target for short-term interest rates for the first time since 2008.
Even as the unemployment rate approaches what is considered a normal level and short-term rates remain historically low, some members of the committee are concerned that raising the target too early would risk a deterioration in the U.S. economy, forcing the Fed to backtrack and return to the crisis-era zero rate policy.
“The biggest risk of tightening too early or too fast is that the economy may weaken more than expected, forcing the central bank to reverse course,” Fed Governor Jerome Powell said last week in a speech in New York City.
Williams, however, downplayed the possibility of that scenario in his interview with Reuters Monday.
In case economic conditions did worsen after a rate hike, Williams said, the Fed would likely just raise rates more slowly than planned, rather than backtracking on the initial rate hike.
Williams, along with Yellen and other officials, has stressed that the Fed’s moves will be based on incoming economic data.
The Fed’s March monetary policy statement announced that the first interest rate hike would come after further improvement in the labor market and when officials are “reasonably confident” that inflation is heading toward its 2 percent goal in the medium term.
Current bond market prices indicate that investors expect the Fed’s move to come sometime after September at the earliest. Williams suggested Monday that the Fed could act to raise rates as soon as the scheduled June meeting if incoming economic data prove positive enough.
