Bloomberg Television’s economics editor Michael McKee spoke with San Francisco Federal Reserve President John Williams in Jackson Hole, WY today, who said that very accommodative policy is what’s needed now.

Federal Reserve Fed FOMC Central Bank Economic Future Inflation
Fed

Williams said, “…it’s clear unemployment is too high and inflation is still too low and it calls for a very strong accommodative policy, and I think that’s been a big factor helping our economy recover. And I wouldn’t want to see us tightening the policy until we’ve made further progress in that some time next year.”

Williams went on to say, “So as [Yellen] said, and I think I agree completely, right now my thinking is that sometime in the middle of next year in my own will be the time to raise the funds rate. But if the economy does better with — than expected, and I sure it hope does, then we would want to raise interest rates a little quicker. If it disappoints, we’ll raise rates a little slower.”

Fed’s Williams Sees Rate Rise Occurring Near Mid-2015

MIKE MCKEE, BLOOMBERG NEWS: …John Williams didn’t see the speech either, so we’re getting his first reaction to what Janet Yellen said. If you look at the way the markets are reacting, it seems to be a status quo speech.

JOHN WILLIAMS, PRESIDENT, FEDERAL RESERVE BANK OF SAN FRANCISCO: Yeah, but I think Chair Yellen did a great job of explaining the issues, describing the thinking going on at the Federal Reserve around the labor market, the improvement in the labor market and where we see it relative to full employment, and really highlighted the difficult issues in trying to understand what’s cyclical and what’s trend. And I think it’s just a very, very good — actually a tour de force of — of all the issues that we’re facing and we’ll be facing the next couple years.

MCKEE: Well it was certainly an even-handed, lengthy look at a lot of indicators besides job creation and unemployment that you’re wrestling with. But some of your colleagues have argued strongly that there isn’t that much information in those peripheral indicators. Do you agree?

Fed’s Williams: Well, I think that one of the things we’re seeing now, which is a good thing, is we’re seeing a lot of coherence across the indicators. They’re all improving. We’re seeing job hires, employment gains, job vacancies improve, and all these things are moving together. So that’s a good sign. So there is still this issue that some of the indicators are suggesting the labor market’s not quite as strong as the unemployment rate. Some are suggesting maybe it’s a little bit stronger and we have to weigh that various evidence in basically trying to figure out where full employment and how much progress we’re making on that.

MCKEE: Well of course you have to decide what interest level will bring about full employment, so what do you want to see before you would decide to vote in favor of changing policy?

Fed’s Williams: Well really it’s — it’s just the way Chair Yellen described. Looking at how much progress we’ve already made towards of our goals of maximum employment and 2 percent inflation, and then where do I see — how long is it going to take to get to those — those markets? And so for my — to my mind, I want to see further progress on the labor market in terms of job gains and reductions in unemployment. And I really want to see more signs of inflation moving back to 2 percent, and also some wage growth moving back from about 2 percent now towards 3 percent. So I really want to see some tangible evidence inflation’s moving back to our goal.

MCKEE: A lot of discussion about the labor markets. Not very much in her speech about inflation. She almost seemed to downplay it as a decision point given the level of inflation that we have right now.

Fed’s Williams: Well inflation right now is below our target and has been for some time. My forecast is it will move back towards that. It is an important factor. I think one of the things that’s difficult is it’s — it’s hard to discern just from looking at wage or price inflation whether there’s slack or not slack on the labor market, something Chair Yellen highlighted some of the difficult issues around that. Still, it’s clear unemployment is too high and inflation is still too low and it calls for a very strong accommodative policy, and I think that’s been a big factor helping our economy recover. And I — I wouldn’t want to see us tightening the policy until we’ve made further progress in that some time next year.

MCKEE: She cited two papers in her speech from the San Francisco, one on wages suggesting that employers couldn’t cut wages a lot during the recession, so now they’re making up for it by holding wages down. Is that the way you see it, that that’s the reason we’re not seeing people get raises at this point? And if so, when does it change?

Fed’s Williams: I agree with that. There’s some great research done by my colleagues at the San Francisco Fed on downward nominal wage rigidity. Basically you really don’t see many wage cuts even during severe recessions. And so the wage data may be a little bit disordered by that. What I’m again looking for — looking to is signs that wages are starting to pick up and move towards something like a 3 to 3.5 percent rate. So we still have a ways to go on that.

Now this year — the evidence that we’ve seen on downward nominal wage rigidity does suggest that we might start seeing some stronger wage increases as the labor market gets even stronger. But I think that’s a positive. It means more money in people’s pocketbooks. It’ll help consumer spending. I don’t see any risk of overshooting inflation right — right now.

MCKEE: Well one of the things the protestors who are here are arguing is if you raise interest rates, wages aren’t going to go up. Is there a connection between the two at this point?

Fed’s Williams: Well it’s — it’s really hard to see the connection between wages and interest rates. To my mind, it’s really about we want to keep job growth and economic growth on a — on a good path to get us back to full employment over the next year or two, getting inflation back to full — a 2 percent target over the next year or two. So right now very accommodative policy is what we need, but we’re seeing improvement in the economy and as we get closer to our goals it will be time to start pulling back and letting the economy grow — grow more on its — on its own. That’s still a ways off in my view.

MCKEE: You were one of the authors of the other paper she cited suggesting that the long-term unemployed have difficulty coming back into the labor market. So that might mean there’s slack in the economy in the short run

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