US doing fine, says San Francisco Fed president

The United States economy is showing strong growth and could hit its 2 per cent average inflation target sooner than expected, said San Francisco Federal Reserve president John Williams yesterday.

"This is my view, but if we have inflation moving clearly towards 2 per cent and if the US economy continues to improve the way it did last year, I think the economy could easily handle two or more (interest rate) increases this year," Dr Williams told reporters after speaking on steering the US economy through turbulent times at the National University of Singapore.

Dr Williams, a non-voting member of the Federal Open Market Committee, noted in his speech that US unemployment has dipped below 5 per cent - the level he believes is the natural rate of unemployment. Another healthy sign is that more Americans are quitting their jobs. "It shows that people have confidence, if they leave their jobs, they'll be able to find another one... Job vacancies today are the highest since they started collecting the data back in 2000."

And while global financial markets have been volatile, he stressed that their swings are unreliable indicators of economic strength: "As Paul Samuelson famously said, the US stock market has predicted nine of the last five US recessions. And I think that we have to keep that in mind."

Dr Williams gave his speech to a packed room that included many bankers, including DBS chief Piyush Gupta, who questioned the policymaker's "kind of conservative" forecast for US inflation to move back to 2 per cent over the next two years when recent data suggests that inflation is picking up faster than that. Dr Williams replied: "I agree there is some upside risk and we'll hit our inflation target sooner... We just want to see more conviction in the data, if you will."

Over the past year, the Fed's preferred inflation measure - the personal consumption expenditures price index - was at 1 percentage point, whereas core inflation ran higher, at about 1.75 per cent.

Dr Williams said: "We have seen in the last few years, a few spikes in core inflation due to prices of apparel, prices of jewellery, they move up and down... We're still trying to make sure that the data we've been seeing in employment, in inflation are real, not a mirage."

On whether the Fed believes the US presidential elections has impact on economic growth, he said: "The presidential cycle, that's part of our democracy. We're focused on kind of the very nerdy, geeky analysis of the data, the outlook - all that discussion is really about economics... We're not seeing any signs in the data right now that consumers or financial market participants are particularly nervous... This is just election season, not something that seems to be affecting people's economic decisions."

A version of this article appeared in the print edition of The Straits Times on March 30, 2016, with the headline 'US doing fine, says San Francisco Fed president'. Print Edition | Subscribe