“If my aim is true and things evolve as expected, the path will look more like an airplane’s gentle ascension than a rocket shooting straight up,” he said.
Even at their peak, rates are likely to be low by historical standards -- perhaps just 3 percent or 3.5 percent, compared to the 4 percent to 4.5 percent that was historically normal, Williams said.
“Global supply and demand has made real interest rates very low and they appear poised to stay that way,” he said.
Participation Rate
The labor force participation rate, which has plummeted and is near its lowest level since the 1970’s, is also unlikely to rebound to a more normal level, Williams said. He attributed the change to the aging of the U.S. population, the fact that younger people aren’t working as much as they used to, and the fact that people are increasingly deciding to have single-income families.
“Overall, the evidence suggests that, even with a quite strong economy, we aren’t likely to see a significant number of people come back into the fold," Williams said today.
Despite such changes, he said the economy has made significant progress, noting that the U.S. has added more than 13 million jobs since 2009, "virtually all of them full-time."
Even as full employment draws near, inflation remains far below the Fed’s 2 percent target, rising just 0.4 percent in November from a year earlier. Still, Williams says he expects that inflation will be at or near target by the end of next year.
“There are reasons for the low level of inflation, in particular the rise in the dollar and the fall in oil prices,” Williams said. “Those effects should peter out, but they’ve had a downward influence on inflation at a time we’ve needed it to rise.”