A pickup in wage growth and inflation are signs of a healthy economy and at this point are not enough to force the US Federal Reserve to raise rates much more this year than the three times it has been signalling, a top policymaker said on Friday.
Faster economic growth, buoyed by strong financial conditions, global growth and the Trump administration’s tax cuts, could mean the Fed raises rates three or four times this year, San Francisco Federal Reserve Bank President John Williams said.
“Both of those possibilities are reasonable to think about, at this point, as options,” he told reporters after a speech here. But he downplayed the likelihood of more aggressive rate hikes.
“The expansion is proceeding at a good pace, unemployment is low, and inflation is finally headed in the right direction again,” said Williams, who votes this year on Fed policy and is said to be under consideration for the position of vice chair under incoming Fed Chair Jerome Powell. “But at the moment, while I’m buoyed by the optimism, I don’t see an economy at risk of shifting into overdrive.”
US stocks fell and the 10-year Treasury bond yield rose to its highest level in four years after Friday’s strong labor market report and a round of weaker-than-expected earnings from several large companies.
Williams said the rise in bond yields may be a “delayed reaction” to good economic news that he’s been seeing for several months now, and said he sees overall financial conditions as still accommodative.
Economic data has strengthened over the last month or two, with a report earlier Friday showing hourly wages rose in January at their fastest pace in more than eight years, and the Atlanta Fed’s GDPNow model spitting out a searing estimate Thursday of 5.4 per cent growth for the current quarter. Unemployment is at 4.1 per cent, lower than most economists think is sustainable in the long run.
Many Fed officials, including Williams, see inflation picking up this year after several years when it lingered below the Fed’s 2-per cent target. On Friday Williams said wage growth has been “ratcheting up” and is likely to intensify, helping lift inflation along with it.
Still, Williams, in remarks to the Financial Women of San Francisco, said he was pleased by what he termed “healthy growth,” but is neither surprised nor concerned.
“I have boosted my growth forecasts for this year, but I don’t see an economy that’s fundamentally shifted gear,” he said. “Given that the economy’s performing almost exactly as expected, you can expect policymakers to do the same.”
Markets are currently pricing in the same three rate hikes this year that the Fed has forecast.
In a separate event in Austin, Texas, Dallas Fed President Robert Kaplan said that recent strong economic data makes him more confident the Fed should raise rates three times this year, reports Reuters.
Williams said he expects the recent tax overhaul to boost economic growth and business investment in the short-term and potentially productivity growth over the longer-term, but said there is little data to go by to estimate the magnitude of those effects.
“I‘m in the wait-and-see mode on this,” he said.