By most measures, including employment, consumer spending, and household wealth, the U.S. economy remains strong, and the Federal Reserve is likely to begin increasing interest rates before the end of the year, John C. Williams, president of the San Francisco Federal Reserve, told ULI Trustees and Foundation Governors during the Institute’s Fall Meeting in San Francisco on October 6. While Williams noted that he speaks only for himself and not the Federal Reserve, he said that when members of the Federal Open Market Committee most recently decided to put off a rate increase, “in my mind, it was a close call.”
He cited several signs of a U.S. economy that continues to grow, despite “significant headwinds from abroad,” such as the slowing economies in Europe and China, and the anti-inflationary effects of low oil prices. “We are closing in on what I consider full employment,” he said. He pegs at 5 percent the naturally occurring unemployment rate, which accounts for things such as people moving between jobs and is thought to be a level that does not fuel inflation. “At 5.1 percent [unemployment], we are essentially at full employment,” he said.
The U.S. economy is entering the seventh year of economic expansion, making it one of the longest expansions in U.S. history, and it is showing good momentum. The economy also experienced more than 3 percent growth in consumer spending last year. “The consumer is on a good trajectory now and will continue to be going forward,” Williams said.
“I do see some emerging signs of imbalances,” he noted, “specifically in asset prices and very specifically in real estate prices.”
Reflecting on the lessons of 2005, when the housing bubble was building, he said there were no good options for how to deal with the developing bubble at that time. “We would have had to act well before then, when the problem was still manageable,” Williams said.
When he considers today’s rapidly increasing housing prices, which are on a trajectory similar to that in the early 2000s, he said, “I don’t think we’re at a tipping point yet, and I’m not trying to argue that we are in some danger of a crash. But what I’m looking at is what path we’re on and what are the potential potholes that we want to avoid further down the road.”
Low interest rates are one reason why housing prices are elevated, he said, and he expects prices to ease when rates increase.
Williams told the trustees, “I think it does make sense to start removing some of the monetary accommodation.” He said he expects the U.S. inflation rate, now 1.7 percent, to get back to 2 percent—the Fed’s target rate—in the next couple of years.
One of the reasons he outlined in favor of raising interest rates sooner rather than later is that it gives the Fed the option to increase rates gradually. If the Fed were to wait too long, it might have to implement more rapid increases that could roil financial markets and disrupt the economy, he noted.