Will they or won't they? It's the biggest parlor game on Wall Street: Will the Fed raise rates this year or remain at zero into 2016?
San Francisco Fed President John Williams is a voting member of the Federal Open Market Committee and thus presumably has better insight on the answer to that question. "At some point later this year is my forecast given how much the data has improved and the fact the economy is in much better condition than it has been last few years," he tells me in the accompanying video.
Specifically, Williams cited the "progress we've made on the [full] employment mandate," as evinced by the unemployment rate falling to a seven-year low of 5.4% in April. That is "close to full employment," he says, forecasting the unemployment rate "will get down to 5% by year-end."
At that juncture he expects "faster wage gains" and says the economy will be "running a little bit hot," citing a belief that "inflation has [already] stabilized and I think moving back to 2%."
Having said that, Williams concedes the unemployment rate "overstates somewhat the strength of the labor market," noting still-elevated levels of individuals working part time who'd prefer full-time jobs and the lackluster labor participation rate, which remains mired in the low 60% range. But "with the economy continuing to grow and with job gains continuing to be pretty good we'll see broader measures of a full strength economy next year," he predicts.
So where does Williams' confidence come from in the wake of the dismal first-quarter GDP numbers?
The Fed President says first-quarter growth was "very disappointing" but believes was the result to "anomalous" (and now familiar) factors such as severe winter weather, the West Coast Port strike and the strong dollar. Williams also noted the Philadelphia Fed's GDPplus indicator, which measures a quarter-over-quarter rate of growth in real GDP, showed the economy grew at 1.7% in the first quarter, i.e. much better than the 'official' 0.2% growth.
Whenever the Fed starts its tightening cycle, Williams own view is "any rate increase we start will be gradual and reflect the fact this economy is doing much better but this economy needs monetary accommodation to keep us on the right path."
He also says some uncertainty about the path of monetary policy is "healthy," suggesting the Fed erred in the 2004-06 cycle when it conditioned the market to expect 25 basis point hikes at every meeting, and then delivered just that.
Generally speaking, Williams seems pretty sanguine about the outlook for the U.S. economy and is "not overly concerned about financial stability". So what is he worried about? International issues top his 'worry list' at present, citing China's short- and longer-term challenges as the top concern, followed by Europe's persistent struggles to generate growth and the potential for a Greek exit from the eurozone.
Watch the accompanying video for more and to hear Williams' answer the oft-heard critique the Fed's favorite inflation gauges don't reflect real-world realities.