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Fed Should Hike Rate in 2015, Says FOMC Member Williams

Fed Should Hike Rate in 2015, Says FOMC Member Williams

Daniel Dubrovsky, Contributing Senior Strategist

Talking Points:

  • Fed’s Williams sees raising interest rates later this year as the next appropriate step for monetary policy
  • US economy continues to expand, unemployment to fall further, inflation to reach 2% over 2 years
  • Sees signs of imbalances emerging in the form of high asset prices, particularly real estate

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San Francisco Fed President John Williams presented a speech on the US economic outlook in the early trading hours of Tuesday. It is important to note that Williams is a voter in the Federal Open Market Committee when it comes time for monetary policy decisions. One of the main takeaways from his speech is that he views 2015 as an appropriate time for the central bank to start raising interest rates. He added that his view is not immutable however and he will respond to economic developments over time.

Diving into the bulk of his projected outlook, Williams said that economic expansion is entering its 7th year with solid momentum. Over the past 5 years, real GDP growth has averaged a little over 2 percent with the pace of recovery to continue despite global headwinds. Consumer spending, roughly 70 percent of US GDP, has increased more than 3 percent over the past year. The San Francisco Fed President expects the unemployment rate to fall below 5 percent later this year and for it to remain there through 2016. His forecast for inflation is for it to reach the 2 percent goal over the next 2 years with risk that it could take longer than expected.

Looking ahead, Williams estimates that the country needs at most 100,000 jobs created each month for stable growth. The last time the US added less than 100K jobs on a monthly basis was in June 2012. Interestingly, the SF Fed President noted that there are signs of imbalances emerging. He sees this in the form of high asset prices, such as real estate. Williams added that the house price-to-rent ratio is at 2003 levels with house prices rapidly increasing. He does not think they are at a tipping point yet but he is looking out for potential potholes in the path to normalization.

The Dow Jones FXCM US Dollar edged modestly higher in the aftermath of the speech. September’s non-farm payrolls data will be released on Friday with the country expected to add 202,000 jobs.

Main Points:

  • Sees interest rate liftoff likely later this year
  • September FOMC rate decision to delay was a close call
  • Sees high asset prices, especially in real estate
  • Expects unemployment to fall below 5% later this year
  • Inflation to gradually move up to Fed’s 2% target
  • October FOMC is a “live” meeting
  • Expects pace of recovery to continue despite strong global headwinds
  • Appropriate path of policy to be gradual

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.