A bellwether Federal Reserve policymaker on Tuesday downplayed concerns about weakness in the global economy, saying the U.S. central bank should only delay an interest rate hike next year if inflation or wages fail to perk up.
John Williams, president of the San Francisco Fed, said in an interview with Reuters that the first line of defense at the central bank, if needed, would be to telegraph that U.S. rates would stay near zero for longer than mid-2015, when he currently expects them to rise.
If the outlook changes "significantly," with inflation showing little sign of returning to the central bank's 2-percent target, he said he would even be open to another round of asset purchases.
The comments from Williams, seen as a good barometer of the views of Fed Chair Janet Yellen, suggest the central bank has been little moved by growing concerns in financial markets over weakness in Europe and China, and remains on track to lift rates. In the interview, Williams repeated he is comfortable with his call for a rate hike about nine months from now.
But "if inflation isn't moving above 1.5 (percent) and we get stuck into that gear, that would argue for a later liftoff," he said. "If we don't see any improvement in wages, that would be a sign that we still have a lot of slack in the economy and we are not getting any inflationary pressure to move inflation back to 2 percent."
MARKETS NOT FAR FROM FED RATE VIEW
A key adviser to Yellen for years, Williams will rotate into a voting spot on the Fed's policymaking panel next year when the central bank is widely expected to start moving benchmark borrowing costs higher for the first time in nearly a decade.
As signals of European weakness grew stronger last week, investors pushed back their expectations for when the Fed would raise rates from June to September of next year, and they see a more gradual pace of rate hikes than predicted by Fed officials.
Asked about shifting investor bets, Williams expressed little concern, saying markets had a fundamentally correct view of the likely path of Fed policy.
