Fed's Williams: four rate hikes in 2016 'not baked in the cake'

By Ann Saphir

SANTA BARBARA, Calif. (Reuters) - The Federal Reserve is set to raise U.S. interest rates four times this year as long as the economy continues to grow, core measures of inflation stabilize, and unemployment continues to drop, a top Fed official said on Friday.

"I don’t need to see anything more than what I see as baseline forecast," John Williams, president of the San Francisco Fed, told reporters after a speech to the California Bankers Association in Santa Barbara.

Williams expects the U.S. economy to grow around 2 percent to 2.25 percent this year, pushing unemployment down from its current 5 percent level and lifting core measures of inflation to about 1.5 percent, closer to the Fed's 2-percent target.

But forecasts are never spot on, he said, and the pace of rate hikes could just as well be faster or slower depending on economic developments at home and abroad. For now, he said, stock market gyrations in China have not affected his view of the U.S. economy or outlook for monetary policy, though he said he is watching closely developments in foreign economies and in the dollar.

After the Fed raised interest rates last month from near zero, investors want to know how fast the U.S. central bank can return rates to a more normal level, given the drag that weak economic growth abroad and excessively low inflation at home has had on the domestic economy. Fed officials on the whole expect to raise interest rates four times this year, while economists and traders generally see only two or three hikes.

"Even though four (rate hikes) is the median projection, that’s not something I see as baked in the cake," Williams said. "It’s just as likely it will be more or less than that depending on what actually happens."

Government data earlier on Friday showed the U.S. job count surged in December, a report which, Williams said, is consistent with underlying good momentum in the economy.

Williams said rising real estate prices are flashing a yellow warning sign of a potentially overly hot economy, but said he does not see other worrisome signs like huge booms in building or credit.

Williams also said he expects the eventual size of the Fed's balance sheet, now holding at $4.5 trillion, to fall to no less than $1.5 trillion, bigger than pre-crisis levels simply because of the growth in currency. Whether the Fed will require $30 billion or $40 billion dollars of bank reserves on top of that to conduct effective monetary policy, or more like several hundred billion dollars, is not something the central bank has yet decided, he said.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)

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