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Fed's Williams Sees QE Extending Into Second Half of 2013

Federal Reserve Bank of San Francisco President John Williams said the central bank will probably continue purchasing bonds well into the second half of next year to bring down U.S. unemployment now at 7.9 percent.

“I expect it will be some time until the job market makes substantial progress towards our congressionally mandated maximum employment goal,” Williams said today in the text of remarks prepared for a speech in San Francisco. “I anticipate that we will need to continue our purchases of mortgage-backed securities and longer-term Treasury securities past the end of this year and likely well into the second half of next year.”

A number of Fed officials said the central bank may need to expand its monthly purchases of bonds after the expiration next month of a program swapping about $45 billion of short-term Treasuries on its balance sheet for longer-term debt, minutes of the Federal Open Market Committee’s Oct. 23-24 meeting showed today. The FOMC last month voted to keep buying $40 billion in mortgage bonds per month to spur the job market.

“Unemployment is well above our mandate, inflation is below our target and the recovery faces serious menaces,” Williams said at the University of San Francisco.

The Standard & Poor’s 500 Index extended declines after release of the minutes, falling 1.4 percent to 1,355.49 in New York. The yield on the benchmark 10-year Treasury was little changed at 1.59 percent.

Bond Holdings

The FOMC is next scheduled to meet Dec. 11-12, shortly before the expiration of the program to extend the average maturity of its bond holdings known as Operation Twist. Williams was among the first Fed officials to advocate an open-ended bond-buying program, which the central bank unveiled in September.

Fed officials in October also discussed whether to link their policy holding the main interest rate at zero to numerical measurements of unemployment and inflation instead of a calendar date, according minutes of the gathering.

Participants “generally favored” the approach of specifying these thresholds over the current one that relies on a date, minutes of the October meeting said. The FOMC currently expects to keep rates low through mid-2015.

Vice Chairman Janet Yellen yesterday endorsed linking the zero-rate policy to economic thresholds, joining Chicago’s Charles Evans, Minneapolis’ Narayana Kocherlakota and Boston’s Eric Rosengren.

Williams, who is a voting member of the FOMC this year, said today the Fed’s forward guidance has helped reduce borrowing costs. He has opposed tying policy to economic indicators, saying that no one or two numbers can provide a comprehensive picture of the economy.

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