WASHINGTON — With steady growth, low unemployment and tame inflation, the U.S. is experiencing a "Goldilocks" economy: Not too hot. Not too cold. But just right.
So says a top Federal Reserve official, who on Friday suggested that the unemployment rate could fall further to 3.5 percent with inflation modestly overshooting the Fed's target for a time without raising concerns.
John Williams, currently president of the Fed's San Francisco regional bank, said that he still expects a gradual pace of three to four increases in the Fed's key interest rate this year. He spoke in an interview with CNBC after the government reported that the unemployment rate fell to 3.9 percent in April, the lowest level in more than 17 years, with 164,000 jobs created.
"I feel this is pretty much a Goldilocks economy," Williams said, noting the strong labor market and moderate gains in wages and inflation. "I see this as all pretty positive."
Williams will be moving next month to take over as president of the Fed's most influential regional bank in New York. Williams is a voter on the Federal Open Market Committee, the panel of Fed board members and regional bank presidents who set interest rates. As president of the New York Fed, he will have a permanent vote and will serve as the FOMC's vice chairman. He will succeed William Dudley, who is retiring from the central bank in June.
A Ph.D. economist and the former research director of the San Francisco Fed, Williams is being viewed as part of the brain trust that Federal Reserve Chairman Jerome Powell, a non-economist, will rely on in setting monetary policy. Also in that group is Richard Clarida, another Ph.D. economist and professor at Columbia University, who was recently nominated by President Donald Trump to serve as vice chairman of the Fed's seven-member board in Washington.
Williams, one of several Fed officials who spoke Friday at a policy conference at Stanford University, said that he was not concerned that unemployment has now fallen below 4 percent with inflation rising. For years the Fed has failed to achieve its target of inflation rising at an annual rate of 2 percent so the recent gains toward that goal were encouraging, he said, noting that both wages and inflation were rising at moderate levels.
At its meeting on Wednesday, the Fed left its key policy rate unchanged at a still-low level of 1.5 to 1.75 percent. The Fed did hike the rate in March and many economists expect the central bank to move again at the June meeting. At its March meeting, the Fed projected raising rates three times this year, the same number of hikes it delivered in 2017.
While many economists believe that the country is now at full employment, Williams said he could see the jobless rate dropping further to around 3.5 percent, with the central bank "modestly overshooting" its 2 percent target for inflation for a time given that the Fed had failed for a number of years after the Great Recession to achieve the 2 percent inflation goal.
"I am personally comfortable with the fact that inflation may overshoot that 2 percent (Fed target) for a while," Williams said.
Dudley, in a separate interview with Bloomberg News, said Friday that he believes the current economic expansion, now the second longest in U.S. history, would likely continue over the next two years, although there are threats to that forecast.
The tensions over trade policy pose a risk as do the projected sharp increases in government budget deficits after the enactment of $1.5 trillion in tax cuts and a recent boost in government spending, he said.
"Are we going to raise trade barriers and get into a trade war?" Dudley asked. "If we go down that bad path, that would obviously create quite a bit of risk for the economy."