US Fed policy maker sees no reason for short-term economic boost from Congress
San Francisco Fed president John Williams has a bullish view on the economy, and is more worried about the US budget deficit
Chicago — The US does not need a short-term fiscal boost from Congress given it is already at full employment and inflation is closing in on the Federal Reserve’s target, a senior policy maker said, giving a bullish assessment of the economy’s health.
John Williams, the president of the San Francisco Fed, told the Financial Times that strong hiring and higher wage inflation, confirmed in Friday’s jobs figures, showed "the stars are aligning" in the US labour market, as he signalled support for forecasts of three quarter-point interest-rate increases this year.
With Donald Trump due to take office next week, Republicans have been discussing radical tax reforms that by some estimates could drive up the federal debt by trillions of dollars over a decade, as well as potential support for public infrastructure.
Central banks have over the past decade frequently demanded extra help from their governments amid concern that politicians are relying too heavily on monetary policy. But, given the rebound in the US economy, some within the Fed question whether a budgetary loosening is now needed.
While Williams has factored a modest lift to growth from potential tax and spending changes into his forecasts, he said economic policy would be best helped by federal action that ensures a sustainable budget deficit and boosts long-term productivity.
He also warned Congress against impinging on the Fed’s ability to set rates by imposing audit requirements or policy rules, amid fresh Republican attempts to clip the central bank’s wings.
"If you were to ask me three years ago, four years ago, when unemployment was still high and the economy was still digging out of a hole, I would have said, sure, fiscal policy would be great to help expedite getting back to full employment -short term fiscal stimulus," Williams said in an interview.
"But today I don’t think we need short-term fiscal stimulus. What we need is really better policies and investments in the long term health of the economy."
Williams is one of about half of Fed policy makers who are already factoring in some fiscal loosening into their forecasts. But he said the possibility of fiscal stimulus was "really not that important" for rate changes in the current year.
"If the economy ends up for whatever reason -fiscal policy or other things -growing faster, if we have more job growth and inflationary pressures pick up, then we will have to raise rates faster. If the economy underperforms we will raise interest rates slower."
Asked how long the Fed should wait before moving rates again after its December increase, Williams said it was too soon to say because he wanted to see more information about the policies likely to emerge from Congress, on top of the regular flow of economic data.
However, when weighing up the chances of unexpected setbacks against the possible positive surprises, Williams said risks were now "neutral or a little bit even to the upside in some cases".
He pointed out that the decision to raise rates in December was unanimous, and the employment and inflation data "speak pretty loudly".
Williams, who does not vote on rates this year but participates in the debate, was speaking on Friday shortly after the release of the December jobs report — which showed that US hourly earnings accelerated at the fastest rate since the financial crisis at 2.9% from December 2015, while hiring remained steady.
"The stars are aligning in a way. Unemployment has come down. Job growth has been good. Other indicators like the Conference Board survey asking people how hard it is to find a job -that has gotten strong for the last year or so. It is really that all the things are moving together."
Williams said discussions with businesses in his region pointed to optimism about the potential impact of tax cuts and deregulation under Trump. But there was also concern among exporters about the prospects for trade barriers, he said, as well as angst about the impact of any restrictions on immigration at a time when available skilled labour was hard to come by.
Trump’s sabre-rattling against China over the scale of its trade surplus with the US has triggered particular worries that the countries could become mired in an outright trade war.
Williams said standard economic analysis showed that significant trade barriers with US partners would be a "big negative" for the economy, causing a negative supply shock that lifts inflation and lowers jobs and output growth. However, he said he saw this as a "low probability event".
Last week, Republican senator Rand Paul reintroduced legislation that would force the Fed’s monetary policy to be audited. Other Republican lawmakers are pushing legislation to make the central bank abide by strict policy rules.
Williams said the Fed legislation would put political pressure on the central bank and interfere with its ability to freely set policy. Attempting to shoehorn the Federal Open Market Committee members under a single policy rule would run counter to the federated structure of the central bank, he said.
However, this did not mean he saw no response to complaints that the Fed is insufficiently transparent about how it conducts policy. He said the idea of an inflation or monetary policy report, akin to those pursued by foreign central banks including the Bank of England, was an attractive one. "We can think about ways to continue to be more responsive around accountability and transparency."
© The Financial Times Limited 2017