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January 16, 2019

US inflation will accelerate to 2% next year


John WilliamsSan Francisco Federal Reserve Chairman, John Williams, supported a gradual rise in interest rates, saying that he expects inflation to increase to 2% target next year, while unemployment continues to fall.

“The gradual rise in interest rates to bring monetary policy back to normal helps us maintain growth in the economy that can be sustainable for longer”, said John Williams in comments on the University of Technology Sydney.

The comments of the San Francisco Federal Reserve Chairman suggest that he is on the side of Janet Yellen, in a heated debate about what should be the response to slowing inflation over the past few months. Although some Fed representatives have advocated a suspension of the campaign to raise interest rates to wait for clearer signals that inflation is really accelerating. Janet Yellen has downplayed the importance of the latest weak data, and suggested that the Fed continue with policy tightening.

“Some specific transient factors suppress inflation down”, said John Williams. “But as some of these factors are now over and the economy is doing well, I expect to reach the 2% target sometime next year”, added he.

These specific factors include the steep decline in mobile phone service prices. This helped Fed’s preferred inflation rate fall to 1.7% in April from 1.9% in March and 2.1% in February.

The good unemployment data is also part from main reference points of Fed in raising interest rates. However, Williams sees danger if Fed is allowed to lower the unemployment rate too much. At 4.3% in May, the unemployment rate in the US is already below what Williams considers to be sustainable – 4.75%. According to him, however, it will continue to go down.

“The very strong labor market is actually putting the economy at risk of exceeding its safe pace and overheating, which in the end could undermine the sustainability of enlargement”, said he. “In view of the strong employment growth we see in the US, I expect the unemployment rate to drop further and remain just over 4% next year”, added Williams.

Earlier this month, the US Federal Reserve raised interest rates for the second time this year. The central bankers outlined another increase for 2017 and three more in 2018, according to forecasts presented after their meeting on June 13-14. Williams does not have the right to vote at the Federal Open Market Commission this year, but will be in 2018.

He confirmed the Fed’s intention to begin to reduce its balance of 4.5 trillion USD already this year, stating that the central bank should start this process slowly and calmly. The goal will be to gradually reduce the ownership of bonds in a well-defined and predictable way.


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