The Federal Reserve will raise interest rates in the middle of next year, Federal Reserve Bank of San Francisco President John Williams predicted, and suggested verbal forward guidance should replace numerical guidance.
With the unemployment rate just 0.1-point above the 6.5% threshold set by the Fed, the panel needs to alter its guidance "very soon," Williams told the Financial Times in an interview published Tuesday.
Verbal guidance is preferable to numerical, which results in everyone paying attention to only one metric, in this case, the unemployment rate, Williams told the paper.
"As we get closer to reaching our goals, I think that the risks of trying to distil the complex set of issues about monetary policy, including potential concerns about financial stability, down to one metric - the cost of that and the potential confusion is just greater than the benefit."
By mid-2015, the jobless rate will fall to 6% and inflation will be about 1.5%, Williams projected, leading to a rate hike. With "everything moving in the right direction," he said, the risk is "overshooting" if monetary policy adjustments aren't made.
Recent weakness in the economy is consistent with poor weather and there would need to be a "substantial change in the outlook" before he'd consider a change in the plan to continue tapering.
Williams told the paper he looks for average monthly job growth of 100,000 to signal employment health.
