Federal Reserve Bank of San Francisco President John Williams said the central bank should be ready to step up stimulus in case economic growth slows and threatens to delay improvement in the job market.
The Fed must “stand ready to do even more if needed to best achieve our statutory goals of maximum employment and price stability,” Williams said today in a speech in Bellevue, Washington. If growth were to worsen or the inflation outlook fall below the Fed’s goal of 2 percent, “additional monetary accommodation would be warranted.”
The U.S. economy added the fewest number of jobs in a year last month, fueling concern the labor market rebound is sputtering as growth overseas slows. Fed officials are scheduled to meet June 19-20, having affirmed a pledge at their April meeting to hold the main interest rate near zero through at least late 2014.
“An effective tool would be further purchases of longer-maturity securities, potentially including agency mortgage-backed securities,” Williams said at a luncheon hosted by the San Francisco Fed.
The Federal Open Market Committee said on April 25 it expects the job market will improve while adding that unemployment remains “elevated.” Fed officials upgraded their forecasts for joblessness, growth and inflation for the year. They will release revisions to those forecasts on June 20.
Labor Department figures showed last week that the unemployment rate unexpectedly rose to 8.2 percent in May while employers added only 69,000 jobs. He said it’s important not to get “carried away by one month’s data.”
“The underlying trend in job growth is probably closer to the 150,000 monthly job gain number that we’ve seen over the past year than to the recent weaker data,” he said.
That still means the unemployment rate will come down only “slowly,” making it likely that the economy won’t reach maximum employment until 2016, he said.
The San Francisco Fed chief said Europe’s debt crisis darkens the U.S. economic outlook and “a financial meltdown comparable to what we saw here during the financial crisis” was possible if “panic takes over” in the region, he said.
Williams said he’s “more pessimistic” about the outlook for U.S. growth than he was earlier because Europe’s debt crisis has boosted corporate bond spreads in the U.S. The debt-rattled region needs a “stronger firewall” to contain the turmoil, he said to reporters after the speech.
The benchmark 10-year yield has rebounded from last week’s record-low to 1.66 percent in New York today as speculation grew that both the European Central Bank and the Fed will act to support global growth. The Standard & Poor’s 500 Index closed 2.3 percent higher to 1,315.13.
Signs of slowing job growth prompted Atlanta Fed President Dennis Lockhart to say today that prolonging Operation Twist, which extends the average duration of bonds in the Fed’s portfolio, is an “option on the table.” Chairman Ben S. Bernanke is scheduled to testify before Congress tomorrow on the economic outlook.
Japan’s struggle to beat deflation has shown the importance of heading off the causes of declining prices, Williams said.
“We’ll do whatever we can to make sure that doesn’t happen” even though “we’re not in a deflationary environment” today, he said in response to an audience question.
Williams, 49, is a voting member of the FOMC this year. He became president of the San Francisco Fed in March 2011.