Federal Reserve Bank of San Francisco President John Williams played down a “low” reading on second-quarter U.S. growth and said the economy could still warrant as many as two interest rate increases this year—or none.

“There's definitely a data stream that could come through in the next couple of months that I think would be supportive of two rate increases,” Williams told reporters Friday after speaking in Cambridge, Massachusetts. “There's data that we could get that wouldn't be supportive of that—it could be one, maybe, or none. Time will tell.”

The U.S. Commerce Department reported earlier Friday that the economy expanded at a 1.2 percent annualized pace, less than half the advance projected by economists in a Bloomberg survey.

Dallas Fed President Rob Kaplan, who also spoke Friday, echoed Williams' wait-and-see attitude, saying he wouldn't “overreact to one data point,” particularly because the report showed consumer spending continued to be strong.

“We're still hopeful for solid GDP growth this year, and the basis for that is the consumer,” Kaplan told reporters at an event in Albuquerque, New Mexico,

The pair were the first Fed officials to speak publicly since policy makers held interest rates steady on Wednesday for the fifth straight meeting. The Fed was slightly more upbeat about the U.S. economy in a statement released after its two-day gathering, taking a step toward an increase later this year without signaling how soon a move might come.

Chair Janet Yellen and her colleagues have been watching for evidence of how headwinds from abroad, including fallout over Britain's decision to leave the European Union, will affect U.S. hiring and progress in lifting inflation toward their goal of 2 percent.

“The GDP number for the second quarter was low,” said Williams, who isn't a voting member of the policy-setting Federal Open Market Committee (FOMC) this year. “Final sales actually looked pretty good,” though, and “a lot of the second-quarter weakness, part of it was really inventory swings.”

Williams also said inflation data were “more or less what I had been expecting,” while the effects on the U.S. economy from the Brexit vote appeared to be “very modest.”

Can't 'Force It'

Kaplan, who doesn't vote on the FOMC until 2017, said the Fed should be looking for opportunities to raise rates, “but you can't force it.”

“What I'm looking for is continuing improvement and forward momentum in GDP,” he said. “A number like this makes you want to see more information.”

Investors apparently agreed. The odds of a September rate hike, as implied by pricing in federal funds futures contracts, dropped to 20 percent from 28 percent on Thursday.

The U.S. central bank has been on hold since it raised its target for the fed funds rates by a quarter-point in December to 0.25 percent to 0.5 percent, ending seven years of near-zero rates. Its most recent forecasts, released in June, showed that the median estimate of policy makers was for two more quarter-point rate increases this year, though six of the 17 officials submitting projections saw only one move.

“It makes sense to continue on the process of the gradual removal of accommodation—my personal view is it makes sense, assuming the data will support that, to raise rates again this year, but it is data-dependent,” Williams said. “We'll get a couple more employment reports, more data on inflation before our next meeting.”

The FOMC next meets Sept. 20-21. Yellen will have an opportunity to air her views on the economy's progress when she speaks on Aug. 26 at the Kansas City Fed's annual policy symposium in Jackson Hole, Wyoming.

Instant Insights /

Weak GDP Doesn't Rule out Rate Hike This Year

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