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Williams Says Fed Should Extend Bond Purchases Into 2013

Federal Reserve Bank of San Francisco President John Williams said the central bank should extend its program of bond purchases into next year by buying both mortgage-backed securities and Treasuries.

“We should continue the MBS purchases into next year and continue the Treasury purchases,” Williams said to reporters today after a speech in Salt Lake City. “I haven’t seen the kind of improvement in labor-market conditions that would call for ending the MBS purchases.”

U.S. companies hired 171,000 workers in October, more than forecast by economists, after a 148,000 gain in September that was more than first estimated, the Labor Department said today. The jobless rate rose to 7.9 percent from 7.8 percent as more people entered the labor force.

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.

The purchases will be warranted until there’s evidence of “a sustained, significant improvement in the labor market,” such as a pace of payrolls growth more than 200,000 jobs a month, Williams told reporters.

‘Not Enough’

“If you talked about 200,000 or 190,000 or that kind of thing, that’s not enough of an improvement,” Williams said. “I would want to see a measurable decline in the unemployment rate and a significant, sustained, well above 200,000 jobs a month on payrolls, and coherence across lots of indicators. Not one that’s strong, but all of them pointing in the same direction.”

Improvement in the labor market failed to keep commodity and technology shares from slumping today.

The Standard & Poor’s 500 Index retreated 0.9 percent to close at 1,414.20 in New York, down 1.6 percent since Sept. 12, the day before the Fed announced the new bond-buying. The yield on the benchmark 10-year treasury was little changed at 1.72 percent after gaining as much as 0.05 percentage point.

Williams said in his speech today that the Fed’s bond-buying will help spur U.S. economic growth to 2.5 percent next year and 3.5 percent in 2014 while not fueling inflation. 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.

‘Desired Effects’

“Our policy measures are having the desired effects,” Williams told community leaders. “We have substantial scope to use monetary policy to stimulate the economy without creating too much upward pressure on prices.”

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.

Wage pressures are limited. Average hourly earnings climbed 1.6 percent in October the same time last year, the smallest gain since comparable over-year records began in 2007, today’s Labor Department report showed. Earnings for production workers rose 1.1 percent in the 12 months to October, the weakest since records began in 1965.

The civilian labor force, those people who are either employed or actively looking for work, jumped by 578,000 in October. The number of people unemployed rose by 170,000, pushing the jobless rate higher.

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 a program called Operation Twist.

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