SAN FRANCISCO (Reuters) - San Francisco Federal Reserve President John Williams said he is spending more time thinking about how fiscal policies under U.S. President Donald Trump could impact the economy, and so far he sees small short-term gains and little for the longer term.
Over the next several months, Williams told Reuters on Thursday, fiscal policy will not matter much to monetary policy. With U.S. unemployment at 4.4 percent and job creation nearly twice what is needed to provide jobs for new entrants to the workforce, the economy is running “somewhat hot,” he said.
The best way to sustain the economy’s momentum, he said, is to slow the economy a bit by gradually raising rates.
But because inflation remains below the Fed’s 2-percent target, and has softened lately, there is no pressure to do more than the two further rate hikes this year that he and most other Fed officials expect, Williams said.
The Fed raised its benchmark rate in March for only the third time since the Great Recession, and Fed Chair Janet Yellen has said the current range of 0.75 percent to 1 percent is still delivering an accommodative boost to the economy.
The bigger question mark, Williams said, is on fiscal policy.
“I had some hope or expectation that some of the fiscal or other federal policies would become more clear; that has not happened,” he said.
While he still is penciling in “modest fiscal stimulus of some kind” in 2018 and 2019, large tax cuts could mean a bigger bump, and spending cuts could by contrast deliver a drag on growth, he said.
Faster growth from more stimulus would likely translate to faster rate hikes; slower growth could mean fewer rate hikes. Fed policymakers currently think they will need to raise rates three times in each of 2018 and 2019.
“From a monetary policy point of view we have to be positioned well, regardless of what actually does happen,” he said. Now is the time for thinking through those various fiscal scenarios, he said.
Trump earlier this week proposed a federal budget that asks lawmakers to cut $3.6 trillion in government spending over the next decade. Though it is unlikely to survive intact on Capitol Hill, Trump’s proposal maps out a balanced budget so long as economic growth rises sustainably to 3 percent.
“I don’t think that happens because you change certain tax rates, or certain policies,” he said, of sustained 3-percent growth. To get that much above the 1.5 percent to 1.75 percent he thinks is currently sustainable would require a giant jump in productivity growth. “I don’t see that as at all likely.”
Williams also said he sees little long-term bump from other policies Trump has proposed. “There’s definitely trade-offs,” he said. “But when you think about specific regulations, it’s hard to see in the data, whether specific regulations, or tax rates...how they fundamentally change the longer term growth of the economy.”
On the Fed’s $4.5 trillion balance sheet, which Fed officials plan to start trimming later this year, Williams said details had yet to be decided, but promised a blueprint “in coming months.”
Once the trimming begins, he said, the Fed will not tinker with the balance sheet plan unless there is a significant shock to the economy.
“I want this to be predictable, well understood, gradual -- not super gradual, or uber-gradual, but gradual over time -- but also to be fundamentally on autopilot,” he said.
Reporting by Ann Saphir; editing by Diane Craft