Fed’s Williams says rates may need to rise above neutral next year

SAN FRANCISCO (Reuters) – The Federal Reserve should continue to raise rates gradually over the next two years, a U.S. central banker said on Friday, with higher borrowing costs perhaps beginning to act as a brake on growth starting early next year.

“The notion that we are trying to stimulate growth to be beyond the longer-run trend … that is no longer the relevant context of thinking of monetary policy once we get closer to neutral,” San Francisco Fed President John Williams told Reuters in his last interview before the Fed’s June policy-setting meeting.

Later this month Williams will move to New York to head the Fed bank there.

The Fed is about three rate hikes away from reaching a “neutral” level, where interest rates are neither adding to or taking away from economic growth, he said. After that, he said, the Fed does not necessarily need to pause on rate hikes, but could drive rates still higher if the economy remains strong and inflation is at or above the Fed’s 2 percent target.

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