The United States has fully recovered from the last recession, and the Federal Reserve is closer now than ever to its twin goals of maximum employment and price stability.
That means interest rates need to be gradually raised back to normal to prevent the risk of the economy overheating, San Francisco Federal Reserve president John Williams said yesterday.
"When you are 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 a sound footing. "The last thing we want to do is to fuel unnecessary or avoidable volatility," he said.
Asked about the uncertainties surrounding fiscal policy under the Trump administration, Dr Williams said: "It is not like we need fiscal policy in the short run to help the economy get back on track. We are actually in a good place in terms of where the economy is even without thinking about fiscal stimulus."