Federal Reserve Bank of San Francisco President John Williams said critics including Nobel laureate Paul Krugman, who say the central bank hasn't done enough to stimulate the economy, disregard how bond buying by the Fed is an untested tool with an ambiguous impact.
“The claim that the Fed is responding insufficiently to the shocks hitting the economy rests on the assumption that policy is made with complete certainty about the effects of policy on the economy,” Williams said in a paper posted today on the San Francisco Fed’s website. “Nothing could be further from the truth.”
The 29-page paper by Williams is an academic response to critics such as Krugman who have said high unemployment and low inflation show the Fed hasn’t done enough to fuel economic growth. The central bank is currently considering reducing its $85 billion in monthly bond purchases even with unemployment at 7.6 percent and the Fed’s preferred inflation index showing prices rising 1 percent from a year earlier, below the central bank’s 2 percent goal.
“Policymakers are unsure of the future course of the economy and uncertain about the effects of their policy actions,” Williams said. “Uncertainty about the effects of policies is especially acute in the case of unconventional policy instruments such as using the Fed’s balance sheet to influence financial and economic conditions.”
Williams cited Krugman, a Princeton University economist, by name in his paper. Krugman didn’t immediately respond to a request for comment in a phone message and an e-mail.
Williams, who titled his paper “A Defense of Moderation in Monetary Policy,” told reporters on June 28 that he supported the timetable for winding down purchases that Fed Chairman Ben S. Bernanke outlined in his June 19 press conference. Bernanke said the Fed could start shrinking the pace of purchases later this year and end them around mid-2014 if the economy performs in line with the central bank’s forecast.
The San Francisco Fed chief has consistently voted with the majority on the Federal Open Market Committee and doesn’t vote on policy this year. He had said as recently as June 3 that the central bank could start trimming its purchases as early as “this summer” and end them by the end of this year if the economy continues to improve. The FOMC plans to meet next on July 30-31.
Williams in his paper today doesn’t discuss the economic outlook or when the Fed should alter the pace of bond purchases. He plans to discuss the paper in a July 12 speech in Vancouver.
“An additional concern about unconventional policies is that changes in these policies may be disruptive” and pose side effects not predicted by economic models, Williams said.
“One implication of this concern for deploying unconventional policy is clear,” he said. “It argues for gradualism in shifts in the stance of policy, both as the policies are increased and are reduced.”