NY Fed's Williams says economy 'as good as it gets' for U.S. central bank

By Howard Schneider

BUFFALO, NY (Reuters) - Current economic conditions are "as good as it gets" for the U.S. central bank, a key policymaker said on Thursday, with steady inflation and low unemployment allowing the Federal Reserve to continue gradually raising rates.

"We can continue to be relatively patient and allow this economy to continue to grow," New York Federal Reserve bank President John Williams said at the University of Buffalo School of Management. There is "room to run" in the current recovery, he said, particularly with weak wage growth indicating some "slack" left in the labor market.

Williams also serves as a Fed vice chair and has a permanent vote on the central bank's policy-setting committee.

The central bank meets in just under three weeks and is expected to deliver its third rate hike of the year as well as fresh economic and policy projections. A fourth hike is expected in December.

Williams said that in surveying risks ranging from stress in emerging markets to possible domestic instabilities, he regards this as a "goldilocks" moment. Inflation is near the Fed's 2 percent target, the labor market is at or near full employment, and there is no sense that financial risks, whether at home or abroad, are particularly acute.

He specifically dismissed the concerns, noted by some of his colleagues, that the narrowing gap between long- and short-term interest rates could risk an "inversion" of the yield curve if the Fed keeps pushing short-term rates higher.

Inversions, in which short-term rates rise higher than those for long-term securities, are taken as a signal of market pessimism, and typically precede recessions.

Williams said that while he accepts that as a historic fact, "I don't want to mechanically apply the math or the evidence from previous periods to this one." He noted that it is the Fed's trillions of dollars in bond holdings that might prevent long-term interest rates from rising.

An inverted yield curve "would not be something I would find worrisome on its own...I don't see an inverted yield curve as being a deciding factor in terms of thinking about where we should go with policy."

He also said that while asset prices are high, he viewed households and businesses as cautious in their spending, in contrast to the years before the financial crisis in which rising home values fueled consumption through the use of home equity loans.

(Reporting by Howard Schneider; Editing by Chizu Nomiyama and Andrea Ricci)