Williams Urges Fed to Avoid Stoking Risk as It Boosts Jobs
Federal Reserve Bank of San Francisco President John Williams said the central bank should avoid encouraging excessive financial risk-taking as it pursues its goals of full employment and stable prices.
“We’re exactly on the right track” with current policy, Williams said in an interview yesterday in San Francisco, predicting unemployment will fall to 5.5 percent by the end of next year and inflation will accelerate to about 1.7 percent. Trying to achieve the Fed’s goals sooner “would take policy actions that might have more negative effects,” he said.
Williams, who has consistently supported record stimulus, said the Fed will probably continue paring its asset purchases and end them late this year. Central bankers should take care not to change their forward guidance on the path of interest rates in a way that eases policy too much, he said.
“Adding more and more stimulus either through asset purchases or even trying to put even stronger forward guidance does create more risks about getting policy right on the exit,” said Williams, who is scheduled to vote on monetary policy next year. It also raises questions about whether the Fed is “contributing to potential risks with financial stability, excessive risk-taking.”
U.S. central bankers last month scrapped a pledge to keep rates low at least as long as unemployment exceeded 6.5 percent and the outlook for inflation was no higher than 2.5 percent, saying instead they would weigh a “wide range” of information. They took that step after the jobless rate fell to 6.7 percent, even as other labor-market indicators showed continued weakness.
Treasuries declined on March 19, pushing yields higher, after policy makers projected interest rates would rise faster than they previously forecast and Fed Chair Janet Yellen said the first increase could occur six months after the asset-purchase program ends. The Federal Open Market Committee decided to trim purchases by $10 billion, to $55 billion, and said further “measured” reductions were likely.
The yield on the 10-year Treasury note rose 1 basis point, or 0.01 percentage point, to 2.72 percent, at 11:58 a.m. in New York, while the Standard & Poor’s 500 Index increased 0.5 percent to 1,881.72.
Since last month’s meeting some Fed officials -- including Minneapolis Fed President Narayana Kocherlakota and Boston’s Eric Rosengren -- have called for a return to quantitative measures of what would prompt an increase in the main rate. Kocherlakota votes on policy this year.
Fed officials will need to rely more on their public speeches to get their messages across rather than cram all their ideas into a single FOMC statement, said Williams, 51. He said that he “liked what we did” with the new guidance announced last month, which he described as “very good.”
“As you get closer to your goals, there are so many factors” behind “when to raise rates and how fast to raise rates,” he said. “It’s impossible to describe it in a page without losing that ability to do policy in the best possible way.”
The San Francisco Fed chief said he doesn’t see the currently “very narrow spreads” in some corners of the credit market such as junk bonds and leveraged loans as “a big risk” to the economy or the financial system. Even so, “that is an issue, and that’s an issue that we need to keep watching.”
“Froth was building quite a bit” in Treasury markets early last year, with the 10-year yield at levels that were difficult to justify with historical relationships, he said. Since then, Treasury yields and mortgage rates have “risen quite a bit,” and are “now totally consistent with a realistic view of where the economy’s going, where term premia should be.”
Williams, who forecast the Fed will start raising interest rates in the second half of next year, said inflation has “bottomed out” and will gradually accelerate to the central bank’s 2 percent target. He said prices have been held down by temporary forces such as a slowdown in health care costs.
“If inflation stays at 1 percent, despite these special factors ebbing, that would be more worrisome,” he said. “If inflation’s persistently low, that would be, all else equal, an important reason to keep interest rates low.”
The personal consumption expenditures price index -- the Fed’s preferred inflation measure -- rose 0.9 percent in the year through February, more than a percentage point below the central bank’s goal.
Minutes of the March 18-19 gathering showed that a few FOMC participants last month proposed adding a pledge to keep rates low if inflation remained persistently below 2 percent. Williams said yesterday he didn’t support such an addition. It should already be clear to investors that the Fed will keep its accommodation in place in the event of “very low inflation,” even if unemployment continued to decline, he said.
Joblessness will probably decline to 6.25 percent by the end of 2014, and the economy will probably grow 2.5 percent to 3 percent this year, he said.
Williams helped push up bond yields in May 2013 after suggesting the Fed should soon start trimming its bond-buying. He was also an early advocate for a so-called open-ended approach to the asset purchases, in which officials specify neither an end-date to the program nor a total amount that they intend to buy.
Before he was tapped to become the district bank’s president, Williams, a San Francisco Fed economist at the time, co-authored a paper showing the economy would benefit from policy makers regularly releasing projections for the main interest rate. The Fed started publishing these projections in January 2012. He became president of the San Francisco Fed in March 2011 after two years as the bank’s director of research.
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