A United States central banker sees a total of three interest rate rises this year as his baseline scenario, but left the door open on a fourth possible hike if the US economy gets an unexpected boost.
The Federal Reserve raised rates in March and is expected to implement a second hike this month.
San Francisco Federal Reserve Bank president John Williams told The Straits Times: "Nothing is set in stone. But with the unemployment rate at 4.4 per cent and the economy adding 108,000 jobs a month with no real signs of slowing, the economy can more than handle a gradual pace of rate increases.
"I'm not worried about the economy stalling or slowing if we continue to raise rates this year," he said on the sidelines of a forum in Singapore earlier this week.
If anything, there is potential for tailwinds to support a fourth rate hike this year, if there is "a big fiscal stimulus or other changes in the outlook". Already, the US economy is showing signs of faster-than-expected growth. Second-quarter growth is tipped at 3 to 3.5 per cent, in a "big rebound" over the first quarter's 1.2 per cent, he added.
Mr Williams, who is an alternate voter on the Federal Reserve's policy committee this year and will be a voting member next year, said the end point of the rate-hike cycle is probably just below 3 per cent.
"Today, the Fed funds rate is below 1 per cent, plus we have a US$4.5 trillion (S$6.24 trillion) balance sheet, so it's about moving monetary policy back to normal before the economy shows signs of overheating... I'm more worried about keeping interest rates as low as they are today for another year or so."
The Fed is set to begin unravelling the huge stimulus implemented after the 2008 financial crisis to support bond markets this year. The Fed scooped up trillions of dollars of Treasuries and mortgage-backed securities, and has been reinvesting the proceeds of securities as they mature, maintaining its balance sheet at about US$4.5 trillion. Reducing the Fed's assets stockpile will likely involve phasing out reinvestments.
Said Mr Williams: "Estimates from the Fed suggest it will take four to five years to get the balance sheet closer to a normal size... We haven't made any decisions on how much reserves to have in the banking system. It's easier to make monetary policy when there is more liquidity in the banking system... My own view is we will be seeing significantly lower reserves than today, but not as low as 10 years ago - several hundreds of billions, as opposed to tens of billions."
Mr Williams said Asia cannot continue to build its economies on an export-driven model to the US. "That potential has been tapped out. Trade as a share of gross domestic product has plateaued over the past 10 years, partly as a result of the financial crisis. If globalisation has hit a peak in terms of trade volumes, obviously Asia would need to find other engines or ways to innovate and develop their economies, and not just count on global trade expanding as rapidly as in previous decades." Africa, India and other countries in Asia still have enormous growth and trade potential, he noted.
Asked about US President Donald Trump's apparently protectionist trade policies, Mr Williams said: "I still live under this fantasy that if I don't talk about what Congress and the administration are doing, they won't talk about what I'm doing."
He acknowledged that trade "gets a lot of attention, because it is easy to blame" for the problem of income inequality in the US. "We have been moving out of sectors like manufacturing, and energy. With each of these transitions, you get this dynamic where certain parts of the country stagnate, while other parts are booming... I think this is a failure of a lot of our policies around trade. We should develop better policies around trade to take into account those who may be losing their jobs, so they will have opportunities for job training to be successful in a changing world."