Fed's Williams Stands by Hike Outlook as Unemployment Drops

(Bloomberg) -- Federal Reserve Bank of San Francisco President John Williams said his outlook for three or four rate increases in 2017 hasn't shifted, as the labor market shows signs of expanding beyond its sustainable rate and the economy is operating above potential.

“I haven't changed, again, my views on what appropriate policy is” for the remainder of the year, Williams told reporters on Friday after a speech in New York, referring to his comments last month that three or four hikes would be required.

On Saturday, at an event in California, Williams said the economy “is operating above potential.”

Fed officials left interest rates unchanged following their meeting this week, indicating that a disappointing first quarter wouldn't stop them from raising rates twice more in 2017 following a hike in March. In their communique, policy makers described as “transitory” a slowdown in first-quarter growth, while emphasizing that inflation was running close to their 2 percent goal and the labor market continued to strengthen.

Labor Department data on Friday backed up that views, showing employers created a greater-than-expected 211,000 new jobs in April as unemployment fell to 4.4 percent, the lowest since 2007. Annual wage gains, though, slowed a touch to 2.5 percent.

“It's nice to see further confirmation that that first quarter GDP number was an aberration,” Williams said of the report. He previously said in response to questions from the audience that the U.S. “is at full employment, or maybe even a little bit beyond.”

Williams, who took over from Janet Yellen at the San Francisco Fed in 2011 when she joined the Fed's Board of Governors, next votes on monetary policy in 2018.

On Saturday he reiterated his view that the Fed this year should start shrinking its balance sheet, which grew to about $4.5 trillion when policy makers carried out asset purchases to protect the economy during the 2008-2009 financial crisis and the period of weak growth that followed.

“We want to move our balance sheet down to more normal levels, for a number of reasons,” Williams said at Stanford University. The Fed wants “a balance sheet that quite honestly in the future we could use if needed in a recession.”

To contact the reporter on this story: Matthew Boesler in New York at mboesler1@bloomberg.net.

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Randall Woods, Ros Krasny