John Williams, the incoming president of the Federal Reserve Bank of New York, said May 15 that the Fed should opt for three or four interest rate hikes this year.
Williams, speaking at an event in Minneapolis, noted that that pace was the consensus view among his colleagues at the Fed, which has been gradually lifting its benchmark rate since December 2015.
"That's kind of a baseline," he said. "If the economy underperforms, we'll go slower. If the economy really does outperform this or inflation does pick up faster than we expect, then obviously we have to adjust to that."
Williams, currently the San Francisco Fed president, is a voter this year on the Federal Open Market Committee, and he will become a permanent voting member when he takes over at the New York Fed next month.
Overall, Williams said, the economy is seeing "very positive" figures, with solid GDP growth, the unemployment rate down to 3.9% and inflation nearing the Fed's 2% target.
He said he was "not ready to say 'mission accomplished'" on the Fed's inflation goal, saying he wants to see a "sustained increase" around 2% over the next couple of years after price growth consistently missed the mark. He also said he was not worried about inflation rising quicker than expected, saying wage increases are still modest and the economy is not showing signs of overheating.
Over the longer term, Williams said he continued to see a concerning trend of a lower natural rate of interest, one that should be in place when the economy is running at full steam.
The rate, known as r-star, helps guide central bankers on where to put short-term interest rates, but the U.S. and other countries have seen declines in the long-run figure. The lower r-star, he said, is partly due to demographic changes and sluggish productivity growth, even though he said some economists have pointed to signs that those concerns may be easing.
"I wish I could join in this optimism, but I don't yet see convincing evidence of such a shift," Williams said.
The recent U.S. tax cuts and increased federal spending will help push up that rate but not enough to lift it substantially, Williams said, adding that most of the effects from the fiscal stimulus will be short-term.
