Fed should not telegraph rate hike, Williams tells CNBC

(Reuters) – The U.S. Federal Reserve should not telegraph ahead of time exactly when it will begin to raise interest rates, a top Fed official said on Monday, putting markets on notice for more volatility in the coming months.

“My personal preference is that we don’t have the most telegraphed policy decisions in history, as we did in 2004,” San Francisco Fed President John Williams said in a CNBC interview. In 2004 the Fed signaled it would raise rates, and then proceeded to do so in a gradual, stepwise fashion. It has not raised rates since 2006, and after the financial crisis slashed them to near zero, where they have stayed for more than six years.

Most Fed officials, including Williams and Fed Chair Janet Yellen, expect the central bank to raise rates sometime this year. Williams on Monday reiterated his view that a rate hike is on the table at every Fed meeting, including one scheduled for next month. A decision, he said, will depend on what the economic data shows.

“You don’t want to make a decision two months or three months in advance,” he said.

Williams acknowledged that giving markets fewer hints on the exact timing of a rate hike could lead to some market swings, especially when important economic data is released.

“In a normal economy there is some volatility in markets, that is just a healthy functioning of markets trying to understand and filter what the data means for policy,” he said. “It’s healthy for the future actions to be uncertain because economic conditions can change.”

Williams reiterated his view that the economy will bounce back this quarter from a weak first quarter, and that the U.S. unemployment rate will drop to 5 percent or below by year’s end, meeting his definition of full employment. He also said he expects that by next year inflation, currently lower than the 2 percent that the Fed sees as healthy, will be moving back up.

(Reporting by Ann Saphir; Editing by Jeffrey Benkoe and Meredith Mazzilli)