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Fed to apply gradual rate hikes, says policymaker

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SYDNEY: With the US economy at full employment and inflation set to hit the Federal Reserve's 2 per cent target next year, the US central bank needs to keep raising rates gradually to keep the economy on an even keel, a Fed policymaker said yesterday.

"If we delay too long, the economy will eventually overheat, causing inflation or some other problem," San Francisco Fed President John Williams said. "Gradually raising interest rates to bring monetary policy back to normal helps us keep the economy growing at a rate that can be sustained for a longer time."

The Fed earlier this month raised interest rates a second time this year, and signaled it plans to raise them once more this year and three times next year.

But with inflation recently weakening and economic growth stuck at 2 per cent, traders have been betting the Fed will end up going much more slowly.

Yesterday, Mr Williams appeared keen to reset those expectations. Like Fed chairman Janet Yellen, Mr Williams said he believes recent weak inflation readings will be transitory, and forecast a return to 2 per cent inflation by next year.

Meanwhile, Mr Williams said labour markets will continue to strengthen, with the US unemployment rate, now at a 16-year low of 4.3 per cent, likely to fall further and stay a little above 4 per cent through next year.

"The very strong labour market actually carries with it the risk of the economy exceeding its safe speed limit and overheating, which could eventually undermine the sustainability of the expansion," he said.

Mr Williams reiterated the Fed's plans to start shrinking its US$4.5 trillion (S$6.25 trillion) balance sheet this year, and promised the Fed will normalise policy in a well-telegraphed, gradual manner so as to reduce unnecessary market disruption both at home and abroad. - REUTERS

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