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Fed’s Williams Says Bond Buying Will Spur Growth

Fed’s Williams Says Bond Buying Will Spur Growth, Not Inflation
The Fed may need to expand its large-scale asset purchases after the scheduled expiration in December of its so-called Operation Twist stimulus, Federal Reserve Bank of San Francisco President John Williams told reporters Sept. 24. Photographer: Andrew Harrer/Bloomberg

Federal Reserve Bank of San Francisco President John Williams said central bank purchases of bonds will help spur U.S. economic growth to 2.5 percent next year and 3.5 percent in 2014 while not fueling inflation.

“Our policy measures are having the desired effects,” Williams said today in remarks prepared for a speech in Salt Lake City. “We have substantial scope to use monetary policy to stimulate the economy without creating too much upward pressure on prices.”

The Federal Open Market Committee, aiming to spur growth and reduce unemployment, on Oct. 24 affirmed plans to buy $40 billion of mortgage-backed securities each month without specifying the total size or duration of the purchases. Williams, who holds a vote on policy this year, was among the first Fed officials to advocate open-ended bond buying.

Concern that large-scale asset purchases “might ignite a bout of inflation” are unwarranted because price increases are being held in check by elevated unemployment and an economy that “isn’t operating at full speed,” Williams said.

“Unemployment is -- and should be -- a central focus of monetary policy right now,” Williams said. “This concentration on getting unemployment down in no way represents a lessening of the importance of price stability,” he said, adding that inflation may slow well below the Fed’s 2 percent goal if the U.S. recovery falters.

‘Slightly Below’

Unemployment will stay above 7 percent at least until the end of 2014 and inflation will remain “slightly below 2 percent for the next few years,” Williams said.

Policy makers should focus more on the full employment aspect of the Fed’s dual mandate than on price stability, Williams said.

While inflation persistently above 2 percent was the “most pressing concern” from the late 1960s through the early 1990s, the “situation is very different” today with inflation averaging 2 percent and unemployment “far above” the maximum level for four straight years, he said.

The Fed may need to expand its large-scale asset purchases after the scheduled expiration in December of its so-called Operation Twist stimulus, Williams told reporters Sept. 24. He didn’t mention such an extension in his speech today.

The Fed bought $2.3 trillion in securities in its previous two rounds of bond buying and has swapped its short-term Treasuries with longer-term securities in Operation Twist.

Vital Signs

The labor market is showing signs of life. U.S. companies hired 171,000 workers in October after a 148,000 gain in September that was more than first estimated, the Labor Department said today. The payrolls report topped the most optimistic forecast in the Bloomberg survey in which the median called for an advance of 125,000. The jobless rate rose to 7.9 percent as more people entered the labor force.

The world’s largest economy expanded at a 2 percent annual rate in the third quarter after climbing 1.3 percent in the prior quarter, the Commerce Department said last month. Economists expect gross domestic product to grow 1.8 percent in the third quarter and 2 percent in the fourth, according to the median of 75 estimates in a Bloomberg survey.

Economic reports yesterday also showed resilience as U.S. manufacturing expanded more than forecast, consumer confidence rose to a four-year high and fewer Americans filed claims for unemployment benefits.

The Institute for Supply Management’s factory index rose to 51.7 in October, the highest since May, from 51.5 in September. The Conference Board’s sentiment index increased to 72.2, the highest since February 2008. Applications for jobless benefits fell 9,000 to 363,000 in the week ended Oct. 27, the Labor Department said in Washington.

Recovery Restrained

The economic recovery may be restrained by Europe’s debt crisis, concern about a U.S. fiscal contraction and doubts about economic growth among consumers and businesses, Williams said.

In the first round of quantitative easing starting in 2008, the Fed bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.

The FOMC at its Oct. 23-24 meeting, while maintaining QE3, repeated that it will probably hold the benchmark interest rate near zero through mid-2015.

“Growth in employment has been slow,” the FOMC said in a statement after the meeting in Washington. “Household spending has advanced a bit more quickly.”

Williams, 50, 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 has served as 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 San Francisco Fed district covers Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah, Washington, American Samoa, Guam and the Northern Mariana Islands.

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