June 30, 2016
This is the seventh in a series of profiles of the members of the Federal Reserve Board’s Open Market Committee [FOMC]. The profiles will focus on their writings, public statements, and voting records as members of the FOMC.
John Williams took over as President of the San Francisco Federal Reserve in March 2011, five months after Janet Yellen’s departure from the post. Williams, who previously served as Yellen’s director of research, is generally considered a moderate dove. He upholds the employment side of the Fed’s dual mandate and has consistently supported quantitative easing and a gradual path for interest rate normalization. The exception to Williams’ more dovish views is that he has called for rate hikes to begin at a relatively early date; however, this is largely because of Williams’ aforementioned support for a slow, gradual course of rate hikes.
Williams has published extensively on monetary policy. In 2006 — about two years before the Fed would reduce the federal funds interest rate to almost zero percent — Williams published a paper warning about the dangers of the zero lower bound (ZLB) on interest rates.[1] He found that the ZLB can be a significant constraint on monetary policy when the general public has imperfect knowledge of policy and the economy; in the paper’s conclusion, Williams noted that the ZLB placed greater emphasis on “the potential use of fiscal policy interventions,” i.e. deficit spending.[1]
After the financial crisis had occurred and interest rates were hovering around zero, Williams published another paper on the ZLB.[2] He found that it was a significant factor in slowing the recoveries of many countries and argued that a two percent inflation target was too low to properly guard against it.2 Columbia University economist Mike Woodford, in his comment on the paper, summarized the policy implications as follows:
“The general tenor of the paper’s conclusions is that it might indeed be prudent to aim for a moderately higher rate of inflation, perhaps as high as four percent a year, which, in the context of U.S. policy, would mean aiming for a rate clearly higher than that pursued for the past two decades” (p. 39).[2]
In 2011, Williams co-authored a paper arguing that quantitative easing (QE) had been relatively effective at mitigating the harmful effects of the ZLB. The paper’s abstract stated that QE had “probably prevented the U.S. economy from falling into deflation”; it also stated that the 2012 unemployment rate would be 1.5 percentage points lower than it would’ve been without QE.[3]
During the months preceding and immediately following his promotion to San Francisco Fed President, Williams spoke out in favor of the Fed’s stimulative policies, arguing that stimulus was necessary during periods of labor market weakness.[4, 5] Williams emphasized the employment side of the Fed’s dual mandate and said that he was concerned not with “too much inflation, but rather too little.” [4] In a February 2011 speech at Stanford University, Williams identified the problems posed by low demand, declaring: “The economy still has enormous slack…Millions of people could be put back to work and many more goods and services could be produced without igniting unwelcome inflation.” [4] After Williams’ promotion in March, an article in the San Francisco Gate stated:
“At a time of economic uncertainty with unemployment rates at around nine percent, economists said Williams is likely to join the Fed’s dovish voices, who emphasize using monetary policy to fight unemployment over raising interest rates to combat inflation.”[5]
In early 2012, Williams spoke out on more than one occasion about the efficacy of monetary stimulus. In February, Williams said that the Fed should resume its QE program if the recovery slowed or if inflation remained below two percent.[6] In March, Williams stated that the economy was “well short of maximum [employment]” and that the Fed should “keep applying monetary policy stimulus vigorously.” [7] On both occasions, Williams foresaw interest rates staying near zero percent through late 2014.[6, 7] However, in a moment that foreshadowed his later support for rate hikes, Williams stated:
“My view is we’ll not raise rates until early 2014 and not normalize the balance sheet until after that. It’s always hard to normalize. I have confidence we know how to raise rates…and hopefully do it in a way that will avoid another recession”
In August, Williams said that he was worried about the recent halt in labor market progress and claimed that interest rates probably shouldn’t be raised until 2015.[8] He also said that a third round of QE (“QE3”) might prove necessary.8 Just a few months later in October he came out firmly in favor of QE3.[9] Williams even went so far as to say that it should be an open-ended program, or that perhaps the Fed should leave it open until unemployment or GDP returned to a certain level.9 This was considered a strong pro-stimulus stance even at the time. In November, Williams argued that past QE efforts had led to lower interest rates; he also stated thatworries about QE leading to higher inflation or financial speculation were poor reasons to oppose the program.[10]
In 2013, Williams continued defending the Fed’s past QE efforts. In January, Williams co-authored a paper consistent with his previous research arguing that although the ZLB had not played a role in hurting the economy between 2008 and 2010, it had slowed the pace of recovery from 2011 onwards.[11] The paper stated that the Fed’s large-scale asset purchases (QE) and forward guidance (statements that the Fed would keep interest rates low going forward) had pushed down medium- and long-term interest rates even when short-term rates couldn’t fall any further.11 Later that year, Williams stated that $600 billion worth of asset purchases — the size of both the QE1 and QE2 programs — had the same stimulative effect as lowering the federal funds interest rate by 0.75 to 1.0 percentage point.[12]
In April 2013, Williams came out firmly in favor of further quantitative easing. His statement was especially strong given the normally opaque, vague language employed by Fed officials discussing monetary policy:
“I see the benefits of our asset purchases continuing to outweigh the costs by a large margin. I expect that continued asset purchases will be appropriate well into the second half of this year. In making this assessment, I don’t have a specific unemployment or job-gain threshold in mind for cutting back or ending these purchases. Instead, I’m looking for convincing evidence of sustained, ongoing improvement in the labor market and economy. The latest economic news has been encouraging. But it will take more solid evidence to convince me that it’s time to trim our asset purchases.” [13]
Just one month later, Williams said that he would be open to slowing the Fed’s asset purchases as early as that summer.[14] He was careful to differentiate between slowing the rate of asset purchases and ending the program entirely; he said that the latter could plausibly occur by the end of the year.[14]
In 2014, Williams began changing his tune in a more fundamental way. Specifically, on a number of occasions between March and October, Williams predicted interest rate hikes starting in mid-2015.[15, 16, 17, 18, 19, 20, 21, 22] He also called for ending the Fed’s QE program by the end of the year.[15, 16, 22] However, his calls for rate hikes were always predicated on a very different set of worries than those of traditional hawks. Notably, instead of viewing rate hikes as an inherently good policy, Williams actually viewed significant rate hikes as a negative and therefore argued that the path for rate hikes should be gradual.[15, 17, 18] Williams stated that if the Fed wanted to avoid hiking rates quickly over a short period of time in order to normalize policy, it would soon have to begin hiking rates at a very slow rate.[15, 17, 18] In a Q&A with the Washington Post, Williams described the ideal path for rate hikes as a “shallow glide path” that “will take quite a long time” and would constitute a “gradual process” — all phrases which emphasized the slow nature of future hikes.[15] Williams stated that he would be open to changing his forecast if inflation continued running well below the Fed’s 2 percent target.[16, 20]
Williams continued pushing this agenda in 2015. The clearest articulation of Williams’ views came in a speech from May in which he stated:
“As I said, it usually takes a year or two for policy to have its full effect, so decisions need to be made with that in mind. It’s like driving a car: You take your foot off the gas when approaching an intersection. The data convince me that inflation will move back up to our target as the economy strengthens and we close in on full employment. By waiting until we’re face-to-face with 2 percent inflation, we could need to slam on the brakes or even skid through the intersection. Overshooting the mark 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. The decision to raise rates is actually three decisions: Not just when, but how quickly and how high. I see a safer course in a gradual increase, and that calls for starting a bit earlier” [23]
In terms of his inflation and full employment forecasts, Williams anticipated that inflation would begin rising as the economy moved closer to full employment. Williams said that the unemployment rate consistent with full employment was 5.2 percent but that involuntary part-time employment would have to come down and labor force participation would have to rise even with a low unemployment rate.[23] In May, he said that the labor market would likely achieve full employment “by next year.” [23] Two months later, when speaking about the Fed’s dual mandate of full employment and two percent inflation, Williams stated: “We’re not there [at full employment], but we’re awfully close. The one remaining goal in terms of monetary policy is seeing inflation move back up toward two percent.” [24] Consistent with his calls for near-term rate hikes, in September Williams came out in favor of a rate hike in either October or December.[25] In October Williams voted to keep the federal funds rate near zero, but in December he voted to raise the rate by 25 basis points.
So far this year, Williams has continued pushing the same view. In April he came out in favor of two rate hikes in 2016, then later upped his call to two to three hikes.[26, 27, 28, 29, 30] He also said that the June FOMC meeting should be “live,” meaning that the Fed should consider a rate increase at the meeting, though it should be noted that he never took a firm stance on a rate hike either way.[29, 31] (Also note that Williams is not a voting member of the FOMC this year, so it is not known how he would have voted in June.) However, in essentially every instance in which he called for higher rates, Williams invoked the words “gradual” or “gradually” to describe the ideal path for rate hikes.[26, 27, 28, 32, 33]
Despite this language, it is unclear just how “gradual” Williams’ preferred hikes actually happen to be. In a May interview with Yahoo! Finance, Williams indicated that three to four rate hikes would be a reasonable target for next year.31 Williams also foresaw monetary policy normalizing — that is, returning to the Fed’s benchmark interest rate for stable two percent inflation — within two years. While this is a somewhat quicker normalization than advocated by some other members of the Fed, Williams has a relatively dovish view of what “normalization” entails. Most specifically, Williams thinks that the benchmark interest rate is 3.0 to 3.5 percent.[31 , 32] This is a far lower range than the 5.2 to 6.5 percent benchmarks pursued by the Fed in the 1990s or mid-2000s. Such a low benchmark rate is consistent with the “secular stagnation” hypothesis advocated by monetary doves such as Larry Summers and Paul Krugman.
In defending his call for near-term rate hikes, Williams expressed concern that inflation would begin to get out of hand based on his assessment of the sixties and seventies:
“If you go back in history, the Fed — I’m thinking back to the 60s and 70s — often waited around a little bit too long to start the tightening cycle. And when inflation had already taken off, and then they have to raise rates rapidly, cause the economy to stall, and then have to cut rates. And that was called the ‘stop-go’ policies…So one of the things we’re trying to do, in my view, is be very forward-looking and think about, ‘hey, although inflation’s not quite to our goal, interest rates are very low, and it’s time to take your foot off the gas very gradually over the next few years so that we can get this smooth landing without the back-and-forth of rates tightening and then having to let off.’ We don’t want to see our policy tightening create conditions that might cause a recession” (12:03–12:47).[31]
This indicates that Williams is more concerned about a 70s style inflation episode than a premature rate hike unnecessarily slowing the economy. Williams seems to break with monetary hawks in saying that the economy is weak today; nonetheless, he is worried about what could happen in the future if rates don’t go up soon.
Overall, Williams seems to be more of a dove than a hawk, though his views are a bit more nuanced than that. Through about mid-2013, Williams was consistently a strong dove. Since then, he’s been what we might call a short-term hawk and a long-term dove. He believes that interest rates should be relatively low in the remote future, as evidenced by his view that the benchmark interest rate should be 3.0 to 3.5 percent. And Williams is hardly sanguine about the effects of large rate hikes, given his worries about the Fed causing a recession if it moves to quickly normalize rates. But in terms of the timing of rate hikes, Williams has been more hawkish, advocating for rate hikes in the midst of an economy that has yet to truly recover from the 2008 recession.
1 Williams, John C. Monetary Policy in a Low Inflation Economy with Learning. September 2006. Federal Reserve Bank of San Francisco.
2 Williams, John C. Heeding Daedalus: Optimal Inflation and the Zero Lower Bound. Fall 2009. Brookings Papers on Economic Activity.
3 Chung, Hess, Jean-Philippe Laforte, David Reifschneider, and John C. Williams. Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events? January 2011. Federal Reserve Bank of San Francisco Working Paper 2011-01.
4 Saphir, Ann. Fed’s John Williams: Recovery Has Achieved “Liftoff”. February 2011. Reuters.
5 Said, Carolyn. John Williams Named CEO of S.F. Federal Reserve. March 2011. San Francisco Gate.
6 Logiurato, Brett. Fed May Resume Bond Buying, SF Fed President Says. February 2012. International Business Times.
7 Roig, Suzanne. Fed Must Keep Applying Stimulus Vigorously. March 2012. Live Mint.
8 David, Javier. Rates May Stay Low Through 2015: Fed’s Williams. August 2012. CNBC.
9 Pender, Kathleen. SF Fed Chief John Williams Favors QE3. October 2012. San Francisco Gate.
10 Williams, John. The Federal Reserve’s Unconventional Policies. November 2012. Federal Reserve Bank of San Francisco Economic Letter.
11 Swanson, Eric T., and John C. Williams. Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates. January 2013. Federal Reserve Bank of San Francisco Working Paper 2012-02.
12 Williams, John C. Lessons from the Financial Crisis for Unconventional Monetary Policy. October 2013. Panel Discussion at the NBER Conference.
13 Williams, John. Transcript – John C. Williams, PhD, President and CEO, Federal Reserve Bank of San Francisco. April 2013. Town Hall Los Angeles.
14 Ito, Aki and Jeff Kearns. Williams Says Fed May Pare Bond Buying in Next Few Months. May 2013. Bloomberg Technology.
15 Mui, Ylan Q. A Yellen Ally at the Fed Thinks Markets Should Calm Down about Rate Hikes. March 2014. Washington Post.
16 Ito, Aki. Williams Urges Fed to Avoid Stoking Risk as It Boosts Jobs. April 2014. Bloomberg Markets.
17 Saphir, Ann. Fed Should Hike Rates in Second Half of 2015: Williams. April 2014. Reuters.
18 Soni, Phalguni. Why John Williams Says Monetary Tightening Won’t Happen Right Away. May 2014. Market Realist.
19 Allen, Karma. Fed’s Williams: First Rate Hike During 2015 Seems Reasonable. August 2014. CNBC.
20 Spicer, Jonathan and Ann Saphir. Exclusive: Fed’s Williams Downplays Global Risks, Eyes U.S. Inflation. October 2014. Reuters.
21 Buck, Claudia. Q&A with John C. Williams, President and CEO of Federal Reserve Bank of S.F. October 2014. Sacramento Bee.
22 Hilsenrath, Jon. A Q&A With San Francisco Fed’s John Williams. October 2014. Wall Street Journal.
23 Udland, Myles. Fed’s Williams: I Think We Should Raise Rates Sooner Rather than Later. May 2015. Business Insider.
24 Hansen, Ronald J. Western Fed Boss Sees Improving Economy, Higher Rates. July 2015. The Arizona Republic.
25 Central Banking Newsdesk. Fed Presidents Talk Up Prospect of 2015 Hike. September 2015. Central Banking.
26 Saphir, Ann. Fed’s Williams Eyes Two 2016 Rate Hikes: Fox Business Network. April 2016. Yahoo! News.
27 Saphir, Ann. Fed’s Williams Says Two or Three U.S. Rate Hikes ‘Reasonable’. April 2016. Reuters.
28 Pramuk, Jacob. Fed’s Williams: 2 or 3 Rate Hikes Reasonable this Year, but Dependent on Data. May 2016. CNBC.
29 Robb, Greg. Fed Officials Williams, Lockhart Stress that June Meeting Is ‘Live’. May 2016. MarketWatch.
30 FOXBusiness. Fed’s Williams: U.S. Election Won’t Stop Rate Hikes. May 2016. Fox Business Network.
31 Underhill, Justine. Fed’s Williams: ‘The Economy Could Withstand a Rate Hike’. May 2016. Yahoo! Finance.
32 Saphir, Ann. Fed Is Clearly On a Path of Returning Rates to Normal: Williams. January 2016. Business Insider.
33 Robb, Greg. Fed’s Williams Is Optimistic about Economy and Sees More Rate Hikes Ahead. May 2016. MarketWatch.
