Fed's Williams Says QE Probably Needed Well Into 2013

Federal Reserve Bank of San Francisco President John Williams said the Fed will probably need to keep buying assets “well into” the second half of the year to combat unemployment that will decline only gradually.

“I anticipate that continued purchases of mortgage-backed securities and longer-term Treasury securities will be needed well into the second half of 2013,” Williams said today in the text of a speech he’s giving in Half Moon Bay, California.

Fed policy makers are debating how long to push forward with a third round of bond purchases. The Federal Open Market Committee at its December meeting expanded its quantitative easing program to $85 billion per month, including Treasury securities, and linked policy to economic indicators for the first time.

“The Fed must do what it can to help the economy improve,” Williams said at the SEMI Industry Strategy Symposium.

The central bank in September announced its third round of quantitative easing without setting an expiration date or a total amount for the purchases. Williams was among the first Fed officials to call for such an “open-ended” approach.

The FOMC said last month it will expand the program to include Treasuries to offset the end of Operation Twist, in which the central bank was swapping its short-term securities for longer-term ones. At that meeting, several officials said they expect to slow or end the purchases “well before” the end of 2013.

“The Fed is missing on both of its goals, especially the maximum-employment mandate,” Williams said, referring to the central bank’s goals of price stability and full employment. “And there are risks that the economy will slow further.”

At the December meeting, the FOMC said it expects to keep interest rates near zero as long as the unemployment rate is above 6.5 percent and inflation is projected to be no more than 2.5 percent. Williams told reporters after his speech today that he expects the unemployment rate to fall to 6.5 percent in the second half of 2015, adding that he believes the current stance of monetary policy is “appropriate.”

Atlanta Fed President Dennis Lockhart said today that while he’s supported the central bank’s open-ended bond purchases so far, further expansion of a record stimulus could complicate the eventual shrinking of the balance sheet.

“I do think the growth of the Fed’s balance sheet could have longer-term consequences that are worrisome,” Lockhart said in a speech in Atlanta. “While I’ve supported these policy decisions to date, I acknowledge legitimate concerns.”

Williams said he expects the economy to grow about 2.5 percent this year and “a little under” 3.5 percent in 2014. The unemployment rate will stay at or above 7 percent at least through the end of next year, the district bank president said.

Responding to a question from the audience, Williams said the time to begin raising interest rates is still “a few years” away. Unprecedented monetary stimulus measures have helped support the economic recovery, while they haven’t worked “as well as we hoped” because of a still-restrictive credit market and the “pretty severe headwinds” that the economy has faced, he said.

Regional bank presidents rotate voting on the FOMC, and Williams is not a voting member this year. He became president of the San Francisco Fed in March 2011.

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