Call it the “Goldilocks economy.” The U.S. economy is not too hot, and not too cold. It’s just right.
Now it’s the Federal Reserve’s job to keep it there, John Williams, president of the San Francisco Fed said in a speech in New York, Wednesday.
By his account, the U.S. economy is already back to normal. The Fed’s two key measures—unemployment and prices—are both near the central bank’s goals, and that’s partly why they’ve raised interest rates twice since December.
“We want the porridge to be just right,” Williams said.
So what does the Goldilocks economy look like? Williams predicts the unemployment rate will fall to around 4.5% by the end of the year. (It was already quite low at 4.7% as of February.)
Meanwhile, inflation will reach the Fed’s goal of 2% a year sometime “in the next year or so,” he said.
So if things are so great, why is the Fed taking away some of the easy monetary policy that got it there in the first place? Amid the recession, the Fed not only lowered interest rates to near zero in an attempt to stimulate more spending in the economy, it also bought bonds through several rounds of its so-called “quantitative easing” policies to push rates even lower.
“I’m often asked, ‘Since things are going well, why not just keep our foot on the gas?’ The answer is that lifting it gradually off the pedal prevents the economy from overheating,” Williams said.
Projections revealed at the Fed’s last policymaking meeting two weeks ago showed officials predict the central bank will raise rates a total of three times this year, including the hike announced on March 15. But Williams said he “would not rule out” the possibility that there could be more.
One of Williams’ peers, Boston Fed President Eric Rosengren also spoke Wednesday, strongly supporting a total of four rate hikes this year.
“It is important to avoid creating an over-hot economy that could require a more rapid tightening of monetary policy,” Rosengren said.
To be clear, the economy is nowhere near “on fire.” Rather, gross domestic product has been growing at an unimpressive 2% rate over the last few years. Most Fed officials expect that to continue into the near future, despite President Donald Trump’s promises for more rapid 4% growth.
Early Thursday, the Bureau of Economic Analysis released revised figures showing GDP grew at an annualized rate of 2.1% in the fourth quarter of 2016. That was slightly stronger than economists had expected, but still signaled a slowdown after the economy had grown at a 3.5% rate in the third quarter.
Neither Williams nor Rosengren are voting members of the central bank’s policymaking committee, the Federal Open Market Committee, this year, but they are given a seat at the table during deliberations. Williams is scheduled to rotate into a voting role on the committee next year.
The Fed’s regional presidents are scheduled to have another chatty day Thursday, with the agenda including speeches by Loretta Mester of Cleveland, Robert Kaplan of Dallas, William Dudley of New York, and Williams again.
