After last week's ridiculous FOMC announcement which forced even such "party line" commentators as Steve Liesman to ask Yellen if the Fed has lost all credibility after its dots tumbled despite surging core inflation and a mandate low unemployment rate, one can be forgiven if all they laugh at the latest Fed "forecast."
Still, it is a Fed forecast, even if one coming from a Fed permadove such as SF Fed's Williams who told Market News International in an exclusive interview that "he will be advocating for another interest rate hike as early as the April meeting of the Fed's rate-setting Federal Open Market Committee - or, failing that, at the June meeting - provided the economy continues to do as well as it has been."
It is unclear just what he means by "as well as the economy has been doing" considering the Fed just slashed its rate hike expectations by 50% ostensibly on a weak U.S. economy, unless of course the Fed's mandate has nothing to do with the US economy and everything to do with the US Dow Jones Industrial Avereage. For those confused, that was sarcasm.
More details from Market News, according to which Williams suggested there is no justification for long delaying further Fed rate hikes in the face of continued labor market improvement and "very encouraging" progress toward meeting the Fed's 2% inflation target.
"All else equal, assuming everything else is basically the same and the data flow continues the way I hope and expect, then April or June would definitely be potential times to have an increase in interest rates," he said.
Global economic and financial risks still remain, as the FOMC acknowledged in its March 16 statement, Williams said, but the U.S. economy has shown an ability so far to surmount those foreign headwinds. Were it not for those downside risks from abroad, he said the Fed should be raising rates even faster.
"If you just looked at this in isolation, the U.S. economy is looking great," he said. "In a vacuum, if it weren't for global factors, we would be raising rates sooner and I think more quickly than we are because of the global factors and because of the uncertainties around that at the zero lower bound."
So Williams admits that the central bank of the United States is no longer the central bank of the United States, but a central bank meant to prevent market turmoil, especially in China, where a stronger dollar recently led to $1 trillion in capital flight. We wonder just which Fed charter the Fed will reference as greenlighting this particular expansion of its mandate
In fact, William said, "We don't even need to see it get better" to increase the funds rate from the current 25 to 50 basis point target range - just a continuation of the kind of output jobs and inflation data that have been coming in.
"Risks from abroad have to be taken into account," and those risks have "heightened" since December when the Fed raised rates off the zero lower bound, he said, but the U.S. economy "has proved remarkably resilient to global factors."
The risks from abroad aren't changing his anticipated trajectory for the fed funds rate over the next couple years, despite the move down in the median projection for the funds rate this year to 0.9% from 1.4% in mid-December. This implies two rather than four additional rate hikes this year.
"My view on the basic contour of rate increases for 2016 and 2017 has not changed since December," he explained. "As long as the data continues to support signs of a strengthening U.S. economy - moderate growth leading to improvement in the labor market and a trend towards firming of underlying inflation back to 2% - what matters to me is the overall path is basically the same."
Actually, Johnny, it has: the Fed previously expected 4 rate hikes; it now expected 2. Even Econ Ph.D.s can grasp the difference we hope.
Downplaying the exact timing of rate hikes en route to his 3.25% "normal," Williams said "it's not important" if one or more rate hikes "slips into 2017." There is no point to even comment on this.
At its most recent meeting, the committee also marked down its median forecast for the expected longer run neutral fed funds to 3.3% from 3.5% in the December Summary of Economic Projections. This is in line with Williams's expectation, which is for the real equilibrium funds rate to equal 1.25%, implying a 3.25% funds rate at the end of 2018 after adding in the 2% inflation assumption.
"The main thing it means is that even with gradual increases, it will only take us two, two and a half years, in my view, to get back to normal interest rates," said Williams, whose past status as Chair Janet Yellen's top advisor gives his remarks added weight in the eyes of many.However, the lower neutral rate also means that in the future, "We're not going to have much of a buffer the next time we get hit by a big shock," he added
A 3.25% neutral funds rate, "if that ends up being the right number," he said, "doesn't give us much room to cut rates. On its own, that means we have a more challenging environment to use monetary policy alone to stabilize the economy."
And the hilarious conclusion: "for now, though, the Fed is considering raising rates, not lowering them. Williams says such a move would be "appropriate" if inflation data continues to move toward 2% in coming months as he expects."
Which is great because this particular economist started this interview declaring just how strong the US economy is; it would be somewhat ironic if in the same interview he admitted that US data is so strong, a rate cut is now merited.
As for the rest of his predictions, to quote Dubya, "please clap" because Williams, along with everyone else, had ample opportunity to dissent with the Fed's March decision. Only one person did, which confirms that anyone else who claims to be a hawk and sees a "strong U.S. economy" can be roundly ignored, mocked and laughed at.