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Fed’s Williams says October rate decision was a close call

Investors even more convinced that the increase will take place in December.
The US economy has reached at least one measure of full employment and the decision to keep interest rates near zero in October was a close one, said John Williams, president of the Federal Reserve Bank of San Francisco.

“To my mind, the decision was a close call, in part reflecting the crosscurrents we’re navigating,” Williams said in the text of a speech delivered Saturday at an education event in Tempe, Arizona. “On one hand, the US economy continues to grow and is closing in on full employment. On the other, in large part due to developments abroad, inflation has remained lower than we’d like.”

Williams told reporters later that he’s waiting to see incoming data before making predictions about a rate increase at the Dec. 15-16 Fed meeting in Washington. His remarks come at a time when investors and economists globally are scrutinizing Fed officials’ public statements for any sign that the first rate increase since 2006 is imminent.

Investors became more convinced that the increase will take place in December after remarks from Fed Chair Janet Yellen and other central bank speakers over the past week signaled confidence in US economic momentum. The October payrolls report, released Friday, showed a gain of 271,000 jobs — the strongest monthly hiring pace all year — and a drop in unemployment to 5% from 5.1% in September.

Market Perception

The Fed’s October post-meeting statement also encouraged market expectations for a December liftoff, in part because it specifically referenced the next meeting. Williams told reporters today that the mention was a “little bit” of a step back toward date-based guidance.

The Fed inserted a reference to its next meeting in response to a view in markets that “December was no longer on the table,” he said.

“The public or market perceptions were that we had completely moved off 2015, and I don’t think that was accurate,” he said. “I think we’re okay now, but I think this is hard. This is going to continue to be hard. Everybody wants clarity.”

Full Employment

Williams was optimistic about the jobs recovery during his prepared remarks.

“With the unemployment rate now at 5%, we’ve reached my estimate of full employment based on that measure,” Williams said, adding that the US should “reach or exceed full employment across a broad set of measures by the end of this year or early next year.”

Williams also said that once the economy is at full strength, “we’re only going to need between 60,000 and 100,000 new jobs a month to keep up with the growing labor force.” In the footnotes to his speech, Williams cited a Chicago Fed paper on the long-term trend of declining labor force participation.

Speaking to reporters later, he said that in the near future — possibly for six months or a year — job gains should exceed that pace to diminish remaining slack in the labor market.

Voting Member

The Fed has a dual mandate of achieving maximum employment and stable inflation, and has kept its benchmark lending rate near zero since 2008 to help guide the economy toward those goals.Williams, a voting member of the policy-setting Federal Open Market Committee this year, said that the inflation side of the mandate remains a concern as the Fed’s preferred gauge hovers just above zero.

Still, he said that his own preferred inflation measure, the Dallas Fed’s trimmed mean PCE index, shows price pressures closer to the Fed’s 2% target. That index strips out certain volatile price components that may reflect temporary factors.

“I see inflation moving back up to our 2% goal within the next two years,” said Williams, adding that the central bank “can’t wait until we see the whites of inflation’s eyes” before acting on rates.

“The decisions we make today have to aim for where we’re going, not where we are, and the economy is a moving target,” said Williams.

An earlier start to raising rates would allow for more gradual policy normalization, Williams said, repeating comments he has made recently. He also said that “experience shows that an economy that runs too hot for too long can generate imbalances that ultimately lead to either excessive inflation or an economic correction and recession.”

©2015 Bloomberg News


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