January 5, 2015 / 4:20 PM / 4 years ago

Fed's Williams: Interest rate hikes after liftoff should be gradual

BOSTON (Reuters) - A top Federal Reserve policymaker said on Monday that the pace of interest-rate hikes after an initial liftoff should be gradual to preserve flexibility and to help a U.S. economy that still may need stimulus.

San Francisco Federal Reserve Bank President John Williams speaks during an interview with Reuters reporters in the Washington bureau, October 14, 2014. REUTERS/Stelios Varias

“My own view is that the pace of tightening would be actually pretty gradual over the next few years once we start liftoff,” said John Williams, president of the San Francisco Federal Reserve Bank. He made his remarks in Boston on the final day of the annual American Economic Association conference.

He said a gradual pace would reflect the fact that, “This is a U.S. economy, (that) although doing a lot better, still needs a monetary accommodation to have above-trend growth, which is what we need for the next few years.”

He added that a lesson learned from the mid-2000s is that sending signals that interest rate increases will happen on a measured pace could send the wrong message.

“I think the lesson from the mid-2000s was that language very quickly became seen as locking us into 25-basis-point increases at every meeting,” Williams said. “In fact, you don’t want to be locked in that way. You want to have the flexibility to tighten policy faster or actually take these pauses in between as appropriate.”

Williams, who is a voting member this year on the Fed’s policy-setting committee, is typically seen as a centrist whose views are in line with those of Fed Chair Janet Yellen.

His comments come as Yellen and the Fed lay the groundwork for the central bank’s first tightening cycle since 2004. The Fed changed its interest rate guidance last month at its policy-setting meeting, adding language in its statement to indicate that it’s moving closer to raising rates.

Williams said discussions within the Fed about raising interest rates are still on track to happen about mid-2015.

He said his view, expressed previously, was that the middle of 2015 was a “reasonable guess” as to when the Fed’s discussion on raising rates would become closer to, “should we do it now or wait a little longer?”

Williams said the U.S. economy has shown “some pretty encouraging signs” over the past several quarters. More recent, he said, has been the rapid decline in energy prices. He called that “a huge plus.”

The Fed has held benchmark interest rates near zero since December 2008.

Reporting By Tim McLaughlin; Additional reporting by Michael Flaherty; Editing by Andrea Ricci

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