Fed’s Williams Says QE3 Poses Risks While Aiding Growth
Federal Reserve Bank of San Francisco President John Williams said the central bank’s unprecedented bond buying may bring unintended consequences as it boosts economic growth without spurring inflation.
Research shows the Fed’s three rounds of asset purchases have been “effective in stimulating growth” by raising prices for financial assets and reducing borrowing costs for businesses and consumers, Williams said today in a speech in Irvine, California. While the unconventional easing poses some risks of inflation, policy makers don’t see signs of unstable prices, he said.
“A policy tool with uncertain effects should not be discarded,” Williams said to students and faculty at the University of California, Irvine. “Conducting monetary policy always involves striking the right balance between the benefits and risks of a policy action,” including higher inflation and excessive risk-taking.
The Federal Open Market Committee last month affirmed its decision in September 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 FOMC at its Oct. 23-24 meeting reiterated that it plans to hold the benchmark interest rate near zero through mid-2015.
Fed policy makers should turn to unorthodox ways of boosting growth and easing financial conditions after keeping the benchmark interest rate near zero since December 2008, he said. Guidance about how long rates will remain low is a main tool in encouraging spending on purchases such as cars and homes or business capital spending, Williams said.
The yield on the benchmark 10-year Treasury note slumped 0.03 percentage point to 1.68 percent today. The Standard & Poor’s 500 Index rallied 0.2 percent to close at 1,417.26 today, extending this year’s advance to 13 percent. The gauge rallied to 1,465.77, the highest close since December 2007, on Sept. 14, a day after the Fed announced its third round of bond purchases.
The FOMC’s announcement in August 2011 that it would keep rates low through mid-2013 caused Treasury yields to decline 0.1 percentage point to 0.2 percentage point, which is a “big” drop, Williams said today.
“The ripple effect through financial markets lowered the cost of credit for all kinds of borrowers,” he said.
The Fed will determine the duration of asset purchases and the total amount of buying based on how quickly the economy recovers, Williams told reporters after the speech. While the U.S. is “one of the stronger economies in the developed world,” and gains in housing and labor markets are likely to be sustained, recovery “is just going to be a long slog,” he said.
Selling the assets will likely occur “at a gradual pace” after policy makers decide the expansion is strong enough to warrant removal of accommodation, he said.
“As we move forward we’re going to start removing, at some point, accommodation, and we’re looking for that perfect soft landing,” Williams said.
“We’ve learned a lot about how to do that kind of balancing act and I feel pretty positive about our ability at least to get that roughly right,” he said. “The thing that’s hard to predict is where the economy is going.”
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