Fed's Williams expects interest rate hikes

May 23, 2016 02:02 PM

The Federal Reserve is on track to hike interest rates in June or July despite risks such as a "Brexit" vote, and will continue with even more hikes next year given U.S. economic strength, a top Fed official said on Monday.

San Francisco Fed President John Williams reinforced the view both within the U.S. central bank and in financial markets that overseas risks, even the Brexit vote he said would loom over next month's decision, are not severe enough to delay rate hikes much longer.

The possibility that Britons could vote to leave the European Union a week after the Fed's June 14-15 policy decision will play a role in that decision, he said, but any market reaction is unlikely to throw the U.S. economy too far off course.

"It's a factor in the decision for June obviously because you have an event right after, and we can obviously hold off until July if we wanted," Williams, speaking to reporters here, said of raising rates at the next two policy meetings.

"But of course we could also make a decision to raise rates at a meeting and if later on economic conditions for the U.S. change, we can always move interest rates back down," said Williams, an influential centrist who does not have a vote on policy this year.

The Fed hiked rates from near zero in December and has since stood pat, including at a late-April policy meeting. But minutes from that meeting, released last week, jolted financial markets as they showed most Fed officials expected to move again in June.

"It's a good thing that markets should be viewing things in a similar light (as) we do, and I think that as the FOMC minutes indicated ... that I and others view the upcoming meetings as live meetings" for a possible rate hike, Williams said of the policy-making Federal Open Market Committee.

Given continued labor market improvement and some indication of inflation strength, Williams expects two or three rate increases this year. There will be "maybe one or two more (than that) next year so maybe three or four next year," he said at the Council of Foreign Relations.

It is unlikely that the Fed would raise rates at back-to-back meetings in coming months and years given its gradual tightening plan, he later told reporters.

"We still get another month's data before the June (14-15 policy) meeting and we want to analyze that and come to our conclusion," Williams said. "I don't know what we'll do in June."

Britons vote in the EU referendum on June 23. If Brexit odds rise, "it will probably have the effect of flight to the U.S." with the dollar rising and yields on Treasury bonds falling, Williams said.

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Jonathan Spicer, Reuters