Fed’s Williams Downplays GDP Weakness, Predicts Rate Hikes – Reuters

By Jonathan Spicer

CAMBRIDGE, Mass. – A top Federal Reserve official indicated on Friday that interest rates could potentially rise up to two times before the end of the year, downplaying recent data that revealed the U.S. economy expanded far less than anticipated in the latest quarter.

John Williams, President of the San Francisco Fed, explained that the weak second-quarter gross domestic product (GDP) reading was influenced by fluctuations in inventories and government spending, adding that some underlying data in the report appears promising.

Williams made these comments shortly after the Commerce Department released figures showing GDP growth at 1.2 percent for the last quarter, following a mere 0.8 percent in the previous quarter. This growth falls short of the Fed’s expectation of around 2 percent for 2016, potentially reinforcing the notion among some investors that the central bank might delay rate increases despite a more optimistic statement from Fed officials earlier in the week.

While Williams, who does not have a vote on policy in the Fed’s remaining meetings this year, acknowledged the disappointing GDP numbers, he pointed out that there are two important employment and inflation reports due before their next meeting in mid-September. “Assuming the data supports it, it makes sense to raise rates again this year,” he stated.

He noted the possibility of receiving data over the next couple of months that could justify two rate increases. However, he also acknowledged that the data might not support any increases or just one. The strong employment report from June, combined with weaker economic growth, indicates that U.S. productivity is even lower than previously assumed.

Regarding the GDP report, Williams remarked, "when I look at the underlying data like final sales… they look good. There are always fluctuations with government spending and inventories, but the recent performance has been particularly negative in both Q1 and Q2."

Earlier this week, the Fed’s policy-making Federal Open Market Committee noted that near-term risks to the U.S. economy have lessened.

Williams, the first official to speak publicly since that statement, indicated it was reflective of positive data on job growth and consumer spending, suggesting the overall U.S. economic expansion is not poised to stall. Additionally, he mentioned that the recent vote by the U.K. to leave the European Union is not expected to significantly impact the U.S. economic outlook.