Williams Says Fed Should Keep U.S. Monetary Throttle Wide Open

Federal Reserve Bank of San Francisco John Williams
John Williams, president of the Federal Reserve Bank of San Francisco. Photographer: Andrew Harrer/Bloomberg

Federal Reserve Bank of San Francisco President John Williams said the U.S. central bank should keep trying to boost growth because it’s missing its goals for employment and price stability, while stopping short of calling for more asset purchases for now.

“I’m sticking with my story that economic growth won’t be that strong,” Williams told reporters yesterday after delivering a speech in Claremont, California. “Going forward, it’s about weighing the costs and benefits of doing more,” he said, adding that he’s looking “at the broad picture for what the outlook on the economy is” instead of a specific threshold that would signal that more easing was unnecessary.

Williams, a voting member on the policy-setting Federal Open Market Committee this year, said that inflation is likely to be about 1.5 percent this year and next, below the central bank’s goal of 2 percent. He also said the current 8.3 percent unemployment rate is “very far from maximum employment,” and that joblessness “will remain well over 7 percent for several more years.”

The FOMC said last month borrowing costs will remain low at least through late 2014, pushing back an earlier date of mid-2013, to help the two-year recovery gain traction. It also voted to maintain its maturity-extension program, announced in September to replace $400 billion of short-term debt in the Fed’s portfolio with longer-term Treasuries in an effort to further lower borrowing costs.

Minimizing Damage

“It’s vital that we keep the monetary policy throttle wide open,” Williams said yesterday. “This will help lower unemployment and raise inflation back toward levels consistent with our mandates. And we want to do so quickly to minimize total economic damage.”

Some policy makers are more optimistic about the economic outlook. James Bullard, president of the St. Louis Fed, said on Feb. 3 that recent data, including that day’s report that the unemployment rate fell to 8.3 percent in January, have been “surprising to the upside.”

“I need to see significant deterioration in the economy and some threat of deflation or inflation moving significantly below our inflation target before I would consider more QE,” Williams said yesterday, referring to bond purchases known as quantitative easing.

The jobless rate last month was the lowest since February 2009, and payrolls climbed by 243,000, the most in nine months and more than the most optimistic forecast in a Bloomberg News survey.

‘Lackluster’ Recovery

Even so, Williams called the economy’s recovery from the worst recession since the Great Depression “lackluster,” and “marked by weak demand and a still very high unemployment rate” in his remarks to students at Claremont McKenna College.

“The Fed is committed to achieving maximum employment and price stability,” said Williams, 49, who became the San Francisco Fed’s president in March 2011 after two years as its director of research. “And we’re doing everything in our power to move towards those goals.”

Fed Chairman Ben S. Bernanke said last week that the unemployment rate understates weakness in the labor market since some people are leaving the workforce because they can’t find jobs, and others are taking part-time work because they can’t find full-time employment.

Williams on Feb. 8 forecast growth of 2.25 percent this year, slower than the 2.8 percent annual pace in the fourth quarter. His estimate is in line with the 2.2 percent median forecast of 79 economists in a survey by Bloomberg News conducted from Feb. 3 to Feb. 9.

Stocks Rise

U.S. stocks rose yesterday, after the first weekly loss for the Standard & Poor’s 500 Index in 2012, as Greece approved austerity plans to secure rescue funds. The S&P 500 advanced 0.7 percent to 1,351.77 at 4 p.m. New York time.

The rally put the S&P 500 less than 1 percent away from its peak nine months ago of 1,363.61, which was the highest level since June 2008. The index has climbed 7.5 percent in 2012, on expectations the global economy will withstand the impact of the euro area’s debt crisis.

Moody’s Investors Service later cut the debt ratings of six European countries including Italy, Spain and Portugal, and revised its outlook on the U.K.’s and France’s top Aaa rating to “negative.”

A worsening of the European debt crisis would have “severe consequences” for the U.S., and the Fed could resort to the emergency lending and liquidity provisions that it did in 2008 to respond, should that risk materialize, Williams said yesterday in response to a question from the audience.

Spain was downgraded to A3 from A1 yesterday, Italy to A3 from A2 and Portugal to Ba3 from Ba2, all with negative outlooks, Moody’s said.

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