BOSTON (1/6/15)--When the Federal Reserve begins raising short-term interest rates, as many analysts expect it will in a few months, the pace at which it raises them should be gradual, predicts John Williams, president of the San Francisco Federal Reserve.
The rate hike ought to be gradual to allow the economy to grow at a strong pace, Williams said.
"My own view is that the pace of tightening ... will be pretty gradual over the next few years, reflecting the fact that this is a U.S. economy that, although it is doing a lot better, still needs monetary accommodation to have above-trend growth, which is what we need for the next few years," Williams said during the American Economic Association's annual meeting (MarketWatch Jan. 5).
The Fed has kept rates pinned near zero for several years as a way to stimulate the economy. But as the economy improves, it may not need to rely on the low rates the central bank has afforded it.
Despite Williams' belief that the rate hike should occur this year, he said he's in "no rush" to tighten monetary policy, especially given the state of the global marketplace, which has struggled of late.
Still, Williams believes the U.S. economy is heading in the right direction.
"The U.S. domestically has a lot of momentum," which outweighs any weakness abroad, he said.
"I am not really worried about ... the risk of further disinflationary pressures beyond the energy price effects, and I am pretty confident we are on the right trajectory in terms of bringing inflation back to 2%."