Fed's Williams Says Record Stimulus Not Inflationary

Federal Reserve Bank of San Francisco President John Williams said the U.S. central bank’s ability to pay interest on bank reserves will enable it to keep inflation in check even after pumping a record amount of stimulus into the economy.

“Some commentators have sounded an alarm that this massive expansion of the monetary base will inexorably lead to high inflation,” Williams said in the text of prepared remarks in San Francisco today. “Despite these dire predictions, inflation in the United States has been the dog that didn’t bark” and “the change is that the Fed now pays interest on reserves.”

The Fed last month expanded a program lengthening the maturity of bonds on its balance sheet, aiming to cut longer- term interest rates and spur hiring. Chairman Ben S. Bernanke signaled the central bank may ease policy even more if job growth falters, including buying securities.

“Getting the timing just right to engineer a soft landing with low inflation is always difficult,” Williams said at the annual conference of Western Economics Association International. “This time, it will be especially challenging, given the extraordinary depth and duration of the recession and recovery.”

Interest Rate

Williams said that when the time comes, the Fed can begin withdrawing its stimulus by raising the interest rate paid on reserves along with its benchmark interest rate, and also by reducing its holdings of longer-term bonds.

Fed officials reduced their forecasts for employment and growth in their June 19-20 meeting, and the policy-setting Federal Open Market Committee said it stands ready to take additional action to promote stronger growth and job gains.

Recent data have fanned concerns the U.S. expansion is stalling, with a report today showing that the Institute for Supply Management’s manufacturing index unexpectedly contracted in June for the first time in almost three years.

Williams, 50, is a voting member of the FOMC this year. He became president of the district bank in March 2011.

The San Francisco Fed chief said in a panel discussion today after his speech that uncertainty around fiscal policy is holding back growth, adding that monetary policy can’t solve all the problems the economy currently faces. The Fed should eventually normalize policy by raising interest rates first then and then reduce the size of its balance sheet, he said.

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

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

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