A Fed official says rates are only halfway back to where they should be
The Federal Reserve is just halfway to raising interest rates to normal levels, Federal Reserve Bank of San Francisco President John Williams said in a CNNMoney interview.
Williams is an alternate member of the Federal Open Market Committee, which sets the rates. Although the Fed has already increased interest rates four times over the last two years, Williams thinks the job is not yet done.
"We do need to see some more rate increases over the next couple years to get us to this normal level," said Williams. "We're probably about half the way there in terms of raising short-term interest rates."
Until recently, the Fed has maintained low interest rates since the financial crisis to support the economy. Since then, it has only raised rates four times, with the first in 2015 and then three increases since December 2016.
While the key interest rate is currently around 1.25%, Williams think that a normal rate would be at 2.5%. However, that is still low compared to historic levels, including the more than 5% rate before the Great Recession and interest rates above 6% in 2000.
Williams now thinks that Fed interference is not necessary in what he calls the “Goldilocks economy” with its low unemployment, strong job growth, and steady economic growth. He also said he expects the unemployment rate to fall to as low 4%. So far, the 10% unemployment rate seen just after the Great Recession had decreased to 4.3% as of July.
In terms of how rates will be affected by policies under the Trump administration, Williams think the economy is insulated for the coming years.
"My own expectation is that fiscal policy isn't going to fundamentally shift the direction of the U.S. economy over the next couple of years," Williams said.
Related stories:
Mortgage bond, Treasury yield spread to widen amid Fed taper, asset managers say
What’s keeping interest rates low?
Williams is an alternate member of the Federal Open Market Committee, which sets the rates. Although the Fed has already increased interest rates four times over the last two years, Williams thinks the job is not yet done.
"We do need to see some more rate increases over the next couple years to get us to this normal level," said Williams. "We're probably about half the way there in terms of raising short-term interest rates."
Until recently, the Fed has maintained low interest rates since the financial crisis to support the economy. Since then, it has only raised rates four times, with the first in 2015 and then three increases since December 2016.
While the key interest rate is currently around 1.25%, Williams think that a normal rate would be at 2.5%. However, that is still low compared to historic levels, including the more than 5% rate before the Great Recession and interest rates above 6% in 2000.
Williams now thinks that Fed interference is not necessary in what he calls the “Goldilocks economy” with its low unemployment, strong job growth, and steady economic growth. He also said he expects the unemployment rate to fall to as low 4%. So far, the 10% unemployment rate seen just after the Great Recession had decreased to 4.3% as of July.
In terms of how rates will be affected by policies under the Trump administration, Williams think the economy is insulated for the coming years.
"My own expectation is that fiscal policy isn't going to fundamentally shift the direction of the U.S. economy over the next couple of years," Williams said.
Related stories:
Mortgage bond, Treasury yield spread to widen amid Fed taper, asset managers say
What’s keeping interest rates low?
