Fed’s Williams Says Bond-Buying Plan Meant to Be Flexible

Federal Reserve Bank of San Francisco President John Williams said the central bank’s third round of asset purchases is meant to be flexible so that officials can adapt and respond to changes in the economy.

“I should stress that our recently announced purchase program is intended to be flexible and adjust to changing circumstances,” Williams said in the text of prepared remarks given in San Francisco today. “It is explicitly linked to what happens with the economy.”

The policy-setting Federal Open Market Committee last month began an open-ended quantitative easing program, and for the first time refrained from specifying how long the program would last or its total size. Williams was among the first policy makers to propose such an approach, which contrasted with the two previous rounds of large-scale asset purchases.

“We said we might even expand our purchases to include other assets,” Williams told the Financial Women’s Association. “But, if we find that our policies aren’t doing what we want or are causing significant economic problems, we will adjust or end them as appropriate.”

On Sept. 13, the FOMC said it would start buying $40 billion in mortgage bonds per month until the labor market improves. It added that it expected to keep its benchmark interest rate low through at least mid-2015, compared with an earlier expectation of late 2014.

‘Strong Measures’

Williams said the central bank decided to take these “two strong measures” to keep the economy going, given the high unemployment rate and inflation that has averaged below the central bank’s 2 percent target.

“It was essential that we at the Fed provide the stimulus needed to keep our economy moving toward maximum employment and price stability,” the district bank chief said. He votes on FOMC policy this year.

If the U.S. economy were to significantly deteriorate, the Fed could further ease policy by buying more of the mortgage bonds and Treasuries that it’s already purchasing, Williams said in response to a question from the audience. The central bank could also explain its policy in a different way, including specifying a target for gross domestic product, he said.

Despite discussions within the Fed to clarify its outlook on policy, it’s “easier said than done” to come up with specific economic indicators that still paint a comprehensive picture of the economy, he said.

In his speech today, Williams said that the housing market has rebounded, while Europe’s debt crisis and a decline in government spending have weighed on growth. In the long run, Congress “must get our fiscal house in order” because of recent expansions in the federal debt, even though policy makers shouldn’t move too quickly in a way that jeopardizes the recovery, he said.

U.S. stocks rose today after a government report showed that retail sales increased more than forecast in September. The Standard & Poor’s 500 Index climbed 0.8 percent to 1,440.13 at 4 p.m. in New York.

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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