Williams Says Fed Should Vigorously Keep Stimulus, QE3 Remains an Option

Federal Reserve Bank of San Francisco President John Williams said the Fed should maintain an “extraordinarily supportive policy” to reduce an unemployment rate that will probably exceed 7 percent for years.

“This is clearly a situation in which we have to keep applying monetary policy stimulus vigorously,” Williams said yesterday in a speech in Honolulu. “Looking ahead, we may need to do more if the recovery falters or if inflation stays well below 2 percent.”

Chairman Ben S. Bernanke told a U.S. Senate committee yesterday that sustained stimulus is warranted even as the expansion gains strength. He gave no indication the Fed is considering providing more accommodation. The policy-setting Federal Open Market Committee in January pledged to maintain low interest rates through at least late 2014 and is scheduled to meet on March 13.

“If the economy does need more stimulus, restarting our program of purchasing mortgage-backed securities would probably be the best course of action,” Williams, a voting member of the FOMC this year, said yesterday at the CFA Hawaii Economic Forecast Dinner.

The central bank pushed down its target interest rate close to zero in December 2008 and has engaged in two rounds of asset purchases totaling $2.3 trillion to boost the economy. Fed officials in January were keeping open the option of a third round of large-scale asset purchases, and Williams reiterated to the audience that’s a tool to use if the economy requires it.

Forecast Risks

Williams said “there’s a risk the economy could do worse than” his forecast for 2.25 percent growth this year and 2.75 percent growth in 2013, citing Europe’s debt crisis as the biggest potential challenge. Fielding questions from the audience after his prepared remarks, he also said an oil-price shock poses a risk to the outlook.

Reports released since the FOMC meeting on Jan. 25 have indicated that the U.S. expansion is gaining traction. Increases in manufacturing helped the economy grow at a “modest to moderate pace” in January and early February, the Fed said this week in its Beige Book business survey.

A report yesterday showed that jobless claims declined to 351,000, matching the lowest level since March 2008. Gross domestic product rose more than forecast in the fourth quarter as companies rebuilt inventories in anticipation of higher demand, the Commerce Department reported earlier this week.

Stronger Stocks

The Standard & Poor’s 500 Index has gained 9.3 percent this year, closing 0.6 percent higher yesterday at 1,374.09.

Even with the economy improving, the unemployment rate may remain above 8 percent into next year and above 7 percent “for several years to come,” Williams said. That compares with the 5.2 to 6 percent level that Fed officials say is consistent with maximum employment. The jobless rate was 8.3 percent in January.

Answering audience questions, Williams said another round of monetary stimulus, known as QE3, will depend on how the economy performs and is “definitely not off the table.” The exit from the Fed’s stimulus measures is likely “several years” away, he said. Because interest-rate changes take time to have their desired effect, Williams said he wouldn’t wait until the economy reaches full employment to raise borrowing costs.

Europe’s Improvement

“My forecast hasn’t changed very much in the past few months” even as an easing crisis in Europe has meant that “some of the downside risks have lessened,” Williams told reporters. He added that the U.S. recovery has yet to become “broad-based,” with the manufacturing industry led by automakers returning to growth while the housing market has “not shown much of a rebound at all.”

While providing no hints of beginning a new round of large- scale asset purchases, Bernanke yesterday reiterated that the job market is still “far from normal.” He also defended the Fed’s move in November 2010 to start a second round of quantitative easing.

“We’ve had about 2.5 million jobs created” since then, Bernanke said to the Senate Banking Committee. “We’ve seen big gains in stock prices, improvement in credit markets.”

Williams became the San Francisco Fed’s president in March 2011 after two years as its director of research.

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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