Gradual Rate Hikes Best Way Forward, San Francisco Federal Reserve Head Says

The U.S. Federal Reserve should stick to its plan of returning interest rates to the normal level by raising them gradually, a senior Fed official said Thursday, projecting unemployment to go down later in the year.

Citing a global slowdown and its effects on the dollar and commodity prices, San Francisco Federal Reserve President John Williams said his forecast had changed little from December, when U.S. central bankers raised interest rates for the first time in almost a decade.

“I therefore continue to see a gradual pace of policy normalization as being the best course. My preferred route is a gradual path of increase,” Williams said, speaking at a Town Hall event in Los Angeles.

“The economy still needs a gentle shove forward from monetary policy,” he added.

However, many economists and investors are betting that the Fed would delay further monetary policy tightening due to a worsening global economy and turmoil in financial markets this year. While in December, interest rates were expected to be hiked four times in 2016, economists surveyed by Reuters now expect just two rate hikes this year.

On Thursday, Williams expressed concern about a slower pace of growth in China but said his overall outlook for the U.S. and the global economy remained unchanged.

On the inflation front, Williams conceded that it was “too low” currently, but said that he expected inflation to reach the Fed’s 2 percent goal within the next two years.

Both Fed Chair Janet L. Yellen and Federal Reserve Bank of New York President William C. Dudley suggested this week that rate hikes were still on the cards, pointing to the underlying health of the U.S. economy, a sentiment echoed by Williams Thursday.

“I still expect to see U.S. GDP growth of about 2.25 percent for 2016. I still expect unemployment to edge down to about 4.5 percent by late in the year ... So I’m not down — it all looks good to me,” Williams said, but reiterated that the direction of the monetary policy should be dependent on data.