Fed won't overreact to good economic news, Williams says

By Ann Saphir

HONOLULU (Reuters) - The Federal Reserve will stick to its plan for "steady, gradual" interest-rate increases, a Fed policymaker said Wednesday despite market gyrations and strong data on U.S. wage growth that has bond traders pricing in faster rising inflation.

"I am going to try to dispel you of the myth that the Federal Reserve is going to overreact or somehow undermine the good news on the economy," San Francisco Federal Reserve Bank President John Williams told community leaders at a luncheon in Honolulu.

Asked by reporters afterwards about the stock meltdown that wiped out $4 trillion in market value worldwide on Monday, Williams said it did not fundamentally change his outlook for inflation to rise back to the Fed's 2-percent target by next year, and for unemployment, now at 4.1 percent, to fall further.

"The economy clearly can handle gradually rising interest rates," he told reporters afterwards. "I'm not really worried about the downside risks of the economy slowing too much."

The Fed signaled last year it would raise rates three times this year, and Williams repeated Wednesday that he sees three or four interest rates this year. A report Friday showing hourly wages grew at 2.9 percent in January, a smart increase from prior readings, was a welcome confirmation of a strong economy, he said.

"I do not see this as a sign inflation is moving faster than I expected," Williams said, adding that in a healthy economy with 2-percent inflation, wages could be expected to grow at between 3 percent and 3.5 percent a year.

Williams, who is said to be under consideration for the position of vice chair under incoming Fed Chair Jerome Powell, said the goal of Fed restrictions announced Friday on asset growth at Wells Fargo & Co was to make the point that "we want the banks in the United States to be following the law and regulations, and we want to make sure that the leadership of the organizations are managing the organizations well and consistent with fulfilling their obligations."

He declined to comment further.

Wells is not allowed to grow beyond the $1.95 trillion in assets it had at the end of last year "until it sufficiently improves its governance and controls," the Fed said Friday. [nL2N1PS2FA]

(Reporting by Ann Saphir; Editing by Diane Craft)