Fed’s Williams Says Economy Is Stronger Than It Looks


Mr. Williams, who will hold a vote on the Fed’s monetary policy committee in 2018, said the Fed should aim to raise rates in December, and three more times next year.

The conversation is edited for length and clarity.

You’ve been pretty upbeat about the economic outlook. Can you explain why?

You look at the jobs data, the gross domestic product data, all the data on how the economy is doing, and I think those have done as well or even better than we were expecting. Obviously, the employment report showed the drop in jobs in September, but we know that was because of the hurricane. I think unemployment will be below 4 percent by this time next year and it’s remarkable — assuming we get below 4 percent — we’ve only seen that a couple of times in the last 50 years.

Yet a lot of prime-age adults have not returned to the work force.

Labor force participation is one of those big questions. I won’t say it’s a mystery, but it’s a big question. What we’ve seen has actually been fascinating. As the labor market has improved and unemployment has come down, the labor force participation for prime-age females, 25-54, looks like it is moving back up quite a bit. But for the men, the same age group, this has been pretty flat. That’s something a lot of economists are trying to sort through. To what extent is it structural? To what extent can policies affect that?

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We’re in a good place to kind of let this economy run a very strong labor market, with inflation low and no signs of inflationary pressures really picking up yet. A couple more years of roughly 4 percent unemployment and we’re going to learn a lot more about this labor force participation issue and really test this out to see if there’s more people who can come back into this labor market.

Your staff has produced some interesting research suggesting that wage growth has been stronger than it seems. Tell us about that.

What my colleagues have highlighted is that a lot of people who are at the end of their careers are retiring, and at the same time we’re pulling in a lot of younger and less experienced workers who are being paid less because they’re new to the work force.

By the way, during the recession this worked the other way. Younger people were laid off and the more experienced workers stayed on, and that helps to explain why we saw wage growth during the recession. To the average person, this is all backward, and that’s why it’s important to look under the hood.

A longstanding economic theory, known as the Phillips Curve, is that inflation increases as unemployment declines. Given unemployment is low, why haven’t we seen stronger inflation?

If you look until 2015 or so, the inflation data basically followed our models, emphasizing the role of weakness in the economy. Where this mystery has happened is really in the last year or two. I view both inflation picking up faster than expected in early 2017 and now the pullback as just part of the variability that’s going to happen. I don’t see any signs that somehow the inflation process is fundamentally changed.

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