US rate hike 'makes sense,' says San Francisco Fed president

San Francisco Federal Reserve Bank President John Williams said It makes sense to gradually move away from the 'extraordinary' stimulus

Now that the United States is closing in on full employment and inflation is likely to rise to target levels, the "next step" should be to start gradually increasing rates, a top US central banker said on Saturday.

"My forecast is that we'll reach our maximum employment mandate in the near future and I'm increasingly confident that inflation will gradually move back to our 2 percent goal," San Francisco Federal Reserve Bank President John Williams said in remarks prepared for delivery to the Arizona Council on Economic Education. "It makes sense, therefore, to start gradually moving away from the extraordinary stimulus that got us here."

The comments suggest that Williams, a centrist policymaker who was Fed Chair Janet Yellen's chief researcher when she had his job before moving to Washington, is leaning toward support of a December rate hike. The Fed has kept interest rates near zero for almost seven years, and the central bank last month said it would consider a rate increase at its Dec. 15-16 meeting, the last of the year.

Traders boosted their bets on such a move after a government report on Friday showed the economy added many more jobs than expected in October, sending the jobless rate down to 5 percent, close to or at full employment.

A Reuters poll of top bond dealers also showed a growing number expected borrowing costs to go up next month, with 15 of 17 looking for an increase.

Inflation has languished below the Fed's goal for years, prompting a few Fed policymakers to still favor waiting on a rate increase until there is better evidence that prices are indeed firming.

On Saturday, Williams said he believes that factors holding inflation down, including weak oil prices and a strong dollar, should soon ebb and allow inflation to bounce back.

"We can't wait until we see the whites of inflation's eyes; if we did, we would overshoot the mark," Williams said. "An earlier start to raising rates would also allow a smoother, more gradual process of policy normalization, giving us space to fine-tune our responses to any surprise changes in economic conditions."

Yellen has also said she wants rates to rise gradually.

Yet Williams stopped short of pointing directly to a rate increase this year, saying as he often has that the data will determine when the Fed should act.