Fed’s Williams: Lags in Monetary Policy Argue for Raising Rates Sooner Rather than Later

March 5, 2015

Honolulu, HI — Given the lag between the implementation of monetary policy and its full effects, John C. Williams today said that he believed the federal funds rate should be lifted before inflation reached the Fed’s preferred 2 percent goal. Mr. Williams, President and CEO of the Federal Reserve Bank of San Francisco, laid out his argument in a speech to the CFA Society of Hawaii. “I take a perspective that looks one or two years ahead—research shows that’s the minimum amount of time it takes for monetary policy to have its full effect.”

“When you’re driving towards a stoplight, you don’t keep your foot on the accelerator; you ease off so you’re ready to stop at your target. Otherwise you slam on the brakes—and probably wind up in the middle of the intersection,” he said.

Addressing concerns that inflation could stall if an earlier hike is imposed, Mr. Williams noted some transitory factors—namely the valuation of the dollar and falling energy prices—currently depressing inflation. He also said that underlying rates of inflation—the measures that strip out the volatile food and energy markets—indicate that the U.S. is on track to meet its target over the next few years. Williams outlined the dangers of waiting too long:

“The data convince me that inflation will move back up to our target as the economy strengthens and we close in on full employment,” he said. “By waiting until we’re face-to-face with 2 percent inflation, we could drastically overshoot the mark—winding up in that metaphorical intersection or even fully running the red light. Overshooting our target would force us into a much more dramatic rate hike to reverse course, which could have a destabilizing effect on the markets and possibly damage the economic recovery.”

Williams stressed that in his view, rates should be lifted gradually and incrementally. “…[I]t’s important to remember that I’m not talking about instituting tight policy, I’m talking about taking a first step in pulling back somewhat on what is a very high degree of accommodation.” He also cited his “mantra”, that “decisions are data-driven,” and that the data will ultimately guide his views on monetary policy.


Rob Sholars
Federal Reserve Bank of San Francisco
(415) 722-6909


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