SAN FRANCISCO — The Federal Reserve’s decision to raise short-term interest rates last month for the first time since the financial crisis puts the central bank in a position to keep future hikes both gentle and slow, a top Fed official said on Friday.
“This was the right move because the economic outlook is good,” John Williams, president of the San Francisco Fed, said in remarks prepared for delivery to the California Bankers Association in Santa Barbara. Unemployment, he said, is set to fall to 4.5 percent by mid-year, as the labor market continues to strengthen.
He was also optimistic on the path of inflation, saying that while inflation, at 0.5 percent, is “obstinately below” the Fed’s 2 percent target, it should rise back to that ideal level as the effects of the stronger dollar wane and the economy strengthens.
“The economy still has a good head of steam,” Williams said, and it could gain traction if the housing market strengthens more than anticipated. Still, he said, there are “some downside risks: the threat of slowdowns and spillovers from abroad or the dollar appreciating further.”
Williams and colleagues last month lifted their target for the Fed’s benchmark rate by a quarter of a percentage point to 0.25 percent to 0.5 percent, and promised future rate hikes would be gradual and contingent on progress toward the Fed’s inflation target.
Williams reiterated that point on Friday, as has every Fed official who has spoken since the December rate rise.
“The path will look more like an airplane’s gentle ascension than a rocket shooting straight up,” said Williams, who does not vote on policy this year but whose views are seen as closely aligned with Fed Chair Janet Yellen.
The Fed’s decision to keep its $4.5-trillion balance sheet steady until rate hikes are “well under way,” will keep longer-term rates from rising too fast as well, he said.
And, in part because interest rates globally are likely to be lower than they historically have been, it will be nearly three years before the Fed can get U.S. rates up to a stable level of around 3 percent to 3.5 percent. That’s the level that many at the Fed now estimate is consistent with a fully healthy economy.
In his prepared remarks, Williams made no direct mention of recent global market turmoil touched off by weak economic data out of China, the world’s No. 2 economy. The remarks were written before the release of the U.S. government’s widely watched monthly jobs report on Friday morning.