Federal Reserve Bank of San Francisco President John Williams, who has consistently backed record accommodation, said monetary stimulus remains necessary and that it will support faster economic growth next year.
Monetary policy is “continuing to provide needed stimulus” and the economy will maintain “steady gains in jobs,” Williams, who doesn’t vote on policy this year, said today in a speech in Boise, Idaho. U.S. fiscal policy is restraining growth, he said.
“As the economy continues to get better, the highly accommodative stance of monetary policy will need to be gradually adjusted back to normal,” Williams said to Idaho business leaders at Boise State University. “The first step will be to slow the pace of asset purchases over time, eventually ending them altogether. This won’t be a slamming on the brakes, it will be an easing off the gas.”
Policy makers said at their Sept. 17-18 gathering they were likely to taper their $85 billion in monthly bond purchases this year, even as they unexpectedly refrained from such a move at the meeting, minutes of the last Federal Open Market Committee meeting released yesterday showed.
A U.S. failure to raise the debt ceiling and a debt default would have unknowable effects on global markets, Williams said to reporters after the speech. Shaken confidence in debt “could be extremely damaging” in the long term. There is a “tail risk scenario” that the fiscal policy deadlock may undermine faith in the U.S. and destabilize the global financial system, he said.
“If those beliefs shift then markets can turn on a dime,” Williams said. “We learned from 2008 that a breakdown in trust and confidence can lead to a run and panic that has unpredictable consequences.”
A budget agreement that involves more fiscal restraint over the next year may make the central bank more likely to extend its stimulus, Williams said. Significant cuts to federal spending would mean “just another year of drag on the economy, and it argues that we’re going to need monetary stimulus longer than we would otherwise,” he said.
The shutdown this month also has caused a “significant degradation of the quality of economic information that we have,” with the government no longer producing reports on economic indicators such as the jobless rate and gross domestic product, Williams told reporters.
The Standard & Poor’s 500 Index rose the most since January, jumping 2.2 percent to close at 1,692.56. The yield on the benchmark 10-year Treasury increased two basis points to 2.68 percent at in New York.
Higher income-tax rates this year are “eating into disposable income” that reduces spending by consumers who are also facing federal budget cuts and sequestration, he said. Spending reductions are subtracting about 1.5 percentage points from economic growth, while “uncertainty” about the deadlock in Congress also hurts confidence, Williams said.
“Business leaders are nervous about tax and regulatory policies,” he said. “Households are worried about jobs and future income. And everyone is uncertain about Washington’s ability to overcome gridlock, including many in Washington. None of this is bolstering anyone’s confidence.”
The FOMC, acting before the Oct. 1 government shutdown, held off tapering bond purchases and indicated that budget cuts and an increase in borrowing costs were drags on the expansion. A partial federal government shutdown lasting through the end of this week would pare 0.2 percentage point from U.S. economic growth, according to the median estimate in a Bloomberg survey of economists.
Inflation will remain “low and stable” and gradually rise toward the central bank’s 2 percent goal, Williams said in his speech.
Williams, 51, became president of the San Francisco Fed in March 2011 after serving as the bank’s director of research. He earned his doctorate in economics at Stanford University and was an economist at the Fed Board in Washington and the White House Council of Economic Advisers. He joined the San Francisco Fed in 2002 as a research adviser.
The Fed is set to have a new chairman after the end of Ben S. Bernanke’s term in January as President Barack Obama nominated Vice Chairman Janet Yellen this week as Bernanke’s successor. Yellen, a key architect of record stimulus, would be the first female leader in the central bank’s 100-year history.
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