US rates should be gradually raised back to normal to prevent economy overheating: Fed's John Williams

San Francisco Federal Reserve president John Williams was speaking to bankers in Singapore at the annual Symposium on Asian Banking and Finance.
San Francisco Federal Reserve president John Williams was speaking to bankers in Singapore at the annual Symposium on Asian Banking and Finance. PHOTO: REUTERS

SINGAPORE - With the United States fully recovered from the last recession and the US Federal Reserve closer now to its twin goals of maximum employment and price stability than it has ever been, interest rates need to be gradually raised back to normal to prevent the risk of the economy over-heating, said San Francisco Federal Reserve president John Williams on Monday morning (May 29).

"When you're docking a boat, you don't run it fast towards the shore and hope you can reverse the engine hard later on. It looks really cool in a James Bond movie, but in the real world it relies on everything going perfectly and can easily run afoul," Dr Williams said.

He was speaking to bankers in Singapore at the annual Symposium on Asian Banking and Finance.

Dr Williams said that based on his forecasts, the process for unwinding the Fed's balance sheet will begin later this year and will be gradual, "boring" and "the most telegraphed monetary policy of our lifetimes".

He added that balance sheet management will take place "in the background", as the Fed continues to use interest rates as the primary lever to keep the US economy from overheating or running too cold.

Dr Williams said that three rate hikes this year, including the one in March, should keep the US economic expansion on sound footing.

"The last thing we want to do is to fuel unnecessary or avoidable volatility," he said.

The symposium was hosted by the Federal Reserve Bank of San Francisco and the Monetary Authority of Singapore (MAS).