Fed's Williams says US economy strong, could hit inflation target sooner than expected

John Williams during an interview in San Francisco, California, on Dec 18, 2015.
John Williams during an interview in San Francisco, California, on Dec 18, 2015.PHOTO: REUTERS

SINGAPORE - 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 on Tuesday evening (March 29).

"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 said after speaking at the National University of Singapore's Lee Kuan Yew School of Public Policy.

Dr Williams, who is a non-voting member of the policy-setting 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, he said: "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, Dr Williams 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 delivered his 25-minute 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 that 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've been riding below our target for over three years in terms of inflation, 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."

Dr Williams also addressed the question of whether the Fed considers the impact the upcoming US presidential elections could have on economic growth: "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.

"My own view is that we're not seeing any signs in the data right now that consumers or financial market participants are particularly nervous about the political events of the year... This is just election season, not something that seems to be affecting people's economic decisions."