Williams Says Fed to Pursue QE3 Until Job Market Rebounds

Federal Reserve Bank of San Francisco President John Williams said the Fed will buy bonds “as long as needed” under its newest stimulus plan, underscoring policy makers’ commitment to reduce unemployment.

“If the economy stumbles, we will keep the program in place as long as needed for the job market to improve substantially, in the context of price stability,” Williams said today in the text of prepared remarks given in San Francisco. As the Fed pursues its dual mandate to promote full employment and stable prices, “the bigger problem today is high unemployment,” he said.

The policy-setting Federal Open Market Committee on Sept. 13 announced a new round of quantitative easing with the purchase of $40 billion in mortgage bonds per month. It said it’s prepared to ease more if the labor market fails to improve.

“Monetary policy cannot solve all problems that affect our economy,” Williams told the City Club of San Francisco. “But it can help speed the pace of recovery and get our country back on track sooner.”

Williams, a voting member of the FOMC this year, was among the first Fed officials to advocate a bond-buying program that’s open-ended rather than limited to a set duration or total amount. The FOMC also said this month that it will probably keep its benchmark interest rate low through at least mid-2015, compared with a forecast of late 2014.

‘Automatic Stabilizer’

The open-ended “approach serves as a kind of automatic stabilizer for the economy,” the district bank chief said. “If conditions improve faster than expected, we will end the program sooner, cutting back the degree of monetary stimulus.”

Helped in part by the Fed’s newest stimulus, the economy will probably grow 2.5 percent next year and 3.25 percent in 2014, Williams said. The unemployment rate, at 8.1 percent in August, may “gradually” drop to 7.25 percent by the end of 2014, he said.

Several headwinds create doubt for the pace of economic growth, including Europe’s debt crisis and government spending cuts, Williams said.

“The economy could find itself teetering on the brink of recession” if Congress fails to avoid the so-called fiscal cliff, the $600 billion of tax increases and spending cuts that will kick in automatically at the end of the year unless Congress acts, he said.

Previous Rounds

The Fed bought $2.3 trillion in securities in its previous two rounds of large-scale asset purchases and has swapped its short-term Treasuries with longer-term securities in a program known as Operation Twist. The U.S. central bank’s newest round of quantitative easing may run through mid-2015 and amount to almost $2 trillion, Jan Hatzius, chief economist at Goldman Sachs Group Inc., said in a note Sept. 21.

Williams, 50, became president of the San Francisco Fed in March 2011.

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